January 2013 was a month to remember for investors as the Dow closed at a five-year high on January 29 (13,954) and it was the best January performance for the Dow since 1994 and the S&P since 1997 (it was the best month for the S&P 500 since October 2011). The market rally stalled slightly at the end of the month as it was announced that GDP contracted by 0.1% in the fourth quarter while previous estimates were calling for growth of 1.0%.
In January the Dow was up 5.8% and the S&P was up 5.1%. Looking at the three indices that I use to track bank preferred stock performance - PowerShares Preferred (NYSEARCA:PGX), PowerShares Financial Preferred (NYSEARCA:PGF) and iShares S&P US Preferred Stock Index (NYSEARCA:PFF) - it's obvious that while the bank preferred market shared in some of the overall market's upside, the lower volatility made for lower overall gains. PGX was up 0.7%, PGF was up 0.8% and PFF increased by 1.3%.
While the returns are lower, the annualized returns of 8.4%, 9.6% and 15.6% for PGX, PGF and PFF, respectively, are stable returns that investors should hopefully be happy with. The bank preferred market has shown lower volatility in both directions - in November 2012 when the overall market was down over 5% mid-month, bank preferreds were only down 2%. With a low volatility asset it's easy to feel like you've missed something when the overall market outperforms and everyone quickly forgets the smaller declines to the overall market. Investors need to remember that in the long run, "steady as she goes" is a pretty solid investment thesis.
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New Issues in January 2013
The new issue market for bank preferreds started out fairly quiet in January 2013 (not unlike the start of years past) with only one new issue in the first three and a half weeks. In the final week of the month, though, the new issue market heated up and four bank preferreds came to market.
As a quick disclaimer, prior to investing in any bank preferreds I recommend that potential investors make sure they understand the risks and nuances associated with the asset class. An overview of these risks is available in Navigating The Risks Of Buying Bank Preferred Stocks.
KKR Financial Holdings (KFN), 7.375% Series A Cumulative Perpetual Preferred Stock
KFP has traded above par essentially from day one. It is a position that offers a solid yield and is backed by one of the premier PE shops in the world. This adds another level of analysis to the security, but if investors can become comfortable with the nature of KKR's work, it is an interesting investment to say the least.
It should be noted that KFP is rated non-investment grade by both Moody's and S&P:
A copy of the KFP prospectus is available on EDGAR by either searching for company filings or by following this link.
In this environment, it's very tough to find yields above 7%. While KFP may be rated non-investment grade, I think the risk profile is appropriate for this position. KKR Financial's performance will be heavily influenced by the markets (as of 2012Q3, 89% of their portfolio was in bank loans and high yield bonds). Buying KFP isn't the same trade as buying bank preferreds from institutions with large deposit bases and strong core banking activity, but as a trade on the financial sector it could be a good one.
First Horizon National Corp (FHN), 6.20% Series A Non-Cumulative Perpetual Preferred Stock
As of month-end, FHN-A has only been trading for four days and all four have been below par. During the four days the average volume has been 300, 500, which should provide potential investors with enough liquidity.
FHN-A is rated non-investment grade by both Moody's and S&P:
Over the past three quarters, First Horizon has been "well capitalized" by all three ratios.
A copy of the FHN-A prospectus is available on EDGAR by either searching for company filings or by following this link.
The capitalization ratios are all well into the "well capitalized" category and have been for some time. Despite the ratings, I'm a buyer of FHN-A this far below par and with a current yield of 6.4%.
FirstMerit Corp (FMER), 5.875% Series A Non-Cumulative Perpetual Preferred Stock
*The ticker listed above is the temporary ticker and once it begins trading on the NYSE it will trade under FMCP.
With only two days of trading at the end of the month, the FMERL price and yield charts are somewhat irrelevant (which is why I have not included the yield chart). I have also not included the volume as the first day contained very heavy trading (1mm+ shares) so any data would have been skewed.
FMERL is rated non-investment grade by both Moody's and S&P:
Over the past three quarters, FirstMerit has been "well capitalized" by all three ratios.
A copy of the FMERL prospectus is available on EDGAR by either searching for company filings or by following this link.
FirstMerit has its headquarters in Akron, Ohio, and is the fourth-largest Ohio bank. In 2010 it integrated three banks - FirstBank, George Washington Savings Bank, and Midwest Bank - and to date the integrations have gone smoothly. FirstMerit is currently in the process of acquiring Citizens Republic, which has branches in Ohio, Michigan, Wisconsin, and Illinois.
The proceeds from FMERL are going toward paying off Citizens's TARP loan. With the integration of Citizens, FirstMerit's pro forma ratios change - Total Risk-Based Capital becomes 13.06% (from 12.50%), Tier 1 Capital Ratio becomes 10.59% (from 11.25%), and Leverage Ratio becomes 7.30% (from 8.43%).
While FirstMerit has been successful with other company integrations, I am going to wait on the sidelines with FMERL for the time being.
JPMorgan Chase & Co (JPM), 5.45% Series P Non-Cumulative Perpetual Preferred Stock
JPMSL began trading on January 31, and closed at $24.75. At this price, JPMSL has a current yield of 5.505% and a yield to call of 5.681%. Both of these yields are comparable to JPMorgan's other recent perpetual fixed rate preferred, JPM-D, which I have outlined in 15 Bank Preferred Stocks That Offer Solid Returns With Minimal Risk.
JPMSL has a split rating with a non-investment grade rating by Moody's and an investment grade rating by S&P:
Over the past three quarters, JPMorgan has been "well capitalized" by all three ratios.
A copy of the JPMSL prospectus is available on EDGAR by either searching for company filings or by following this link.
JPMorgan has proven to be a very solid financial institution despite hiccups like the London Whale. With improving ratios that move the bank farther and farther into the "well capitalized" category, I would recommend buying JPMSL. If you want established liquidity (although I am not worried about the liquidity of this position), JPM-D offers a similar return profile and has been trading with over 200k shares on average per day.
Zions Bancorporation (ZION), 6.30% Series G Non-Cumulative Perpetual Preferred Stock
*ZIONL is the temporary ticker and once it begins trading on the NYSE it will trade under ZB-G. ZIONL was issued on January 31, and did not begin trading until early February. Since $25 is par, that is listed as the current price above.
There are two features that make ZIONL different than the other preferreds issued this month. The first is that the call date is in 10 years (whereas the others are in five), and the second is that after the call date, ZIONL becomes a floating rate security with a coupon of 3-month LIBOR plus 4.24%.
ZIONL is rated non-investment grade by both Moody's and S&P:
Zions has been considered "well capitalized" by all three ratios during the past three quarters.
A copy of the ZIONL prospectus is available on EDGAR by either searching for company filings or by following this link.
Zions is a strong west coast bank that has the capitalization ratios to prove it. Despite non-investment grade ratings from both Moody's and S&P, the 6.3% coupon is very compelling. Add to this that it becomes a floating rate security in 2023 so you have protection when rates go up (3ML + 4.24%). With this, I recommend buying ZIONL.
In January 2013, there were five new bank preferreds issued. Here is a quick snapshot of how they stack up:
December 2012 New Issue Performance
It is important to also track the performance of newly issued bank preferreds during their second month as it gives investors the opportunity to analyze the first full month of performance data. December 2012 was a fairly quiet month as only two bank preferreds were issued: TCF Financial Corp (NYSE:TCB) 6.45% Series B and SunTrust Banks (NYSE:STI) 5.875% Series E.
Both TCB-C and STI-E traded up in January 2013. Relative to their respective December 31, 2012 prices, TCB-C increased by 2.25% and STI-E increased by 1.43%. Both of these exceeded the performance of the overall bank preferred market.
Bank Preferred Stocks Called in January 2013
In January, Wells Fargo (NYSE:WFC) announced the redemption of four Trust Preferred Stocks:
The new issue market started the year off slow but picked up steam at the end of January. The overall market was up huge during January while the bank preferred market posted monthly gains around 1%. It's important to remember that while lower volatility may limit your swings to the upside, it also limits you to the downside when the market trades off (see November 2012).
With rates still at all-time lows, financial institutions are going to continue to issue new fixed rate preferreds. It is important to remember that these securities are at risk of price declines when rates rise and that this is something investors need to be well aware of when investing in perpetual fixed rate preferreds.
Additional disclosure: I am long JPM-D, JPMSL, KFP, and ZIONL