Market Signals Review

Canada’s banks are more highly rated by Moody’s and have higher market-implied ratings than any other banking region globally. The combination of strong underlying credit fundamentals, a prudent regulatory environment, sound government fiscal management policies, and a more stable real estate market have all contributed to the superior standing of Canada’s banks. Investors seeking a safe haven from continuing fiscal budget troubles in Europe and continuing credit uncertainties in other regions may well find the Canadian banks to be an attractive option.

Author: Allerton (Tony Smith) and Ervis Deda
Date: April 10, 2012

After a positive spell following the launch of the ECB’s Long-term Refinancing Operations Spanish bank credit spreads have been widening and their implied ratings have been falling again, as investors have refocused on the considerable, and unresolved, challenges facing the country and its banks. Additional signs of strain are evident among sub-sovereign entities, with market signals on Spanish regions weakening as well. All this also had an impact on the market’s view of the Kingdom of Spain’s creditworthiness, as the potential liability on the sovereign (for supporting the banks and the regions) has grown.

Author: Lisa Hintz and Ervis Deda
Date: April 9, 2012

The Federal Reserve required 19 bank holding companies (BHCs) to estimate their capital positions under a variety of stressed assumptions over a nine-quarter period ending in Q4 2013. Following the Fed’s March 13 announcement of stress test results, the EDF measures and EDF-implied ratings improved more than fixed income market signals. Some CDS spreads, individual CDS-implied ratings, and bond-implied ratings also improved after the release of the stress test results. But overall equity market signals produced a greater degree of outperformance.

Author: Allerton (Tony) Smith and Ervis Deda
Date: March 26, 2012

Market-based probabilities of default of many sovereign debt issuers deteriorated slightly by the end of this past week following a weaker than expected survey of European purchasing managers. CDS-implied EDF (Expected Default Frequency) credit measures of Spain worsened noticeably. Most of the increase occurred on Wednesday, after economists of financial institutions in the U.S. and Europe publicly identified Spain as a continuing source for financial risk, and Moody’s Investors Service noted that the country’s fiscal situation remains challenging.

Author: Jerry H. Tempelman, CFA
Date: March 26, 2012

Market-based probabilities of default of many sovereign debt issuers improved slightly towards the end of this past week after it became apparent that enough investors would participate in the Greek debt exchange that was a condition of the country receiving further official financial assistance.

Author: Jerry H. Tempelman, CFA
Date: March 12, 2012

While good news is afoot for the major banks according to cyclical measurements, secular concerns continue to dominate investor attention. There’s been a reduction in net charge-offs for eight consecutive quarters and problem loans for seven consecutive quarters. Capital levels have improved. The FDIC just reported that full-year net income for the all insured banks was $26.3 billion, a $4.9 billion increase from $21.4 billion in 2010.

Author: Allerton (Tony) Smith, Lisa Hintz and Ervis Deda
Date: March 5, 2012

Market-based probabilities of default of many sovereign debt issuers improved by the end of this past week, as market participants sensed that policymakers were resolving obstacles that had been standing in the way of reaching agreement on how to structure a second Greek rescue package. Indeed, late Monday night, European finance ministers concluded a deal, under which Greece is to receive €130 billion in new financial aid, in return for agreeing to implement structural economic reform measures intended to bring the country’s debt load down to just over 120% of its GDP.

Author: Jerry H. Tempelman and Yukyung Choi
Date: February 21, 2012

CDS spreads on Spanish banks have rallied sharply, in line with “risk-on” trade that has swept the euro markets. In the coming months the imposition of more stringent capital requirements should further help the sector. As we discuss below, the new rules are likely to lead to the injection of new capital, the consolidation of weaker entities, and to greater transparency around asset quality.

Author: Lisa Hintz and Ervis Deda
Date: February 13, 2012

Spreads for the CDS and cash bond markets for banking companies in the US and Europe improved steadily since the height of contagion risk concern last fall. While volatility in spread movements remains evident, the clear trend is for credit spread contraction. Over the last eight weeks the CDS-implied ratings for the three peer groups we assembled for banks in the US and in Europe outperformed the broad market.

Author: Allerton (Tony) Smith and Ervis Deda
Date: February 6, 2012

Market-based probabilities of default of many sovereign debt issuers continued to improve during the first half of this past week, and remained roughly unchanged once it became apparent that Greek debt restructuring negotiations were not proceeding as smoothly as hoped for. As in recent weeks, Portugal was again a notable exception.

Author: Jerry H. Tempelman and Yukyung Choi
Date: January 30, 2012

Most of the headlines around the European banking and sovereign crisis have understandably been focused on the euro zone. In this analysis we shift the focus to Eastern Europe by looking at market signals on Austrian banks, which to a large degree are driven by their high levels of exposure to central, eastern, and southeastern Europe (the CESEE region).

Author: Lisa Hintz and Ervis Deda
Date: January 30, 2012

Credit spreads have tightened for many banks recently, but the most significant improvement in market-implied ratings over the last year was for the smaller, regional banks. This flight to safety by investors shows an avoidance of numerous risks associated with the more complex banking franchises. It also demonstrates that these largest banks’ designation as systemically important financial institutions (G-SIFI), or “too big to fail,” holds no appeal for fixed income investors.

Author: Allerton (Tony) Smith and Ervis Deda
Date: January 23, 2012

Historically low interest rates are compelling US investors to reach for yield by loading up on debt at the very bottom of the rating scale. But they might have waited too long to make their move: in the past, such issues — which we define as rated Caa and below — only outperform higher rated categories if bondholders capture the initial post-recession rebound.

Author: Ben Garber
Date: January 17, 2012

Market-based probabilities of default of many European sovereign entities declined noticeably in recent weeks. The improvement followed the large amount (€489 billion) of three-year loans extended by the European Central Bank (ECB) to European commercial banks on December 21. During the sovereign debt crisis, observers have suggested that the ECB become a lender of last resort not just to European banks but also to European governments.

Author: Jerry H. Tempelman and Yukyung Choi
Date: January 9, 2012

Issuance of industrial, financial, and utility debt declined by 8% between November and December, from $213 billion to $196 billion. December is traditionally a slow month, of course, but this year’s drop-off was less than has traditionally been the case. The average decline in origination between November and December is 22%, for the period going back to 2005.

Author: David W. Munves
Date: January 4, 2012