It seems like the window has opened for bank preferred issuance. After a successful $875mm issue on the 19th by Wells Fargo (NYSE:WFC) (with a $125mm over-allotment), Bank of America (NYSE:BAC) issued $1B of a perpetual preferred today.
Let's look at the offerings:
Pricing was somewhat as one would expect - Wells 50bps tighter than BAC due to their better rating and all around better franchise.
That's all well and fine, but how do the issues stack up against other preferreds by these two banks and their peers. The peer selections I have chosen were culled from the "Bank Preferred Rundown" series I wrote (and checked to ensure they were still valid and optimal).
The two new issues versus existing and peers:
As the above table shows, the two new issues are not the optimal selections from the issuing banks. The problem for many investors, however, is the aversion to premium. This aversion will limit the selections and lead to a sub-optimal selection. If there is a premium aversion, then these issues might be more attractive.
Expressed graphically, we see the following on a stripped yield basis:
When looking at this chart, it is evident that the new issues are not as attractive (from a stripped yield basis) as existing preferreds or the preferred stock of peers. Citigroup and First Republic have the highest yielding preferreds of the peer group, with Wells and Goldman bringing up the rear (lowest yields).
The selections can also be viewed on an interest rate risk relative basis by looking at basis points per unit of duration:
On an interest rate risk relative basis, the Citi, Morgan Stanley, Goldman and Wells (WFCPrR) shine as they are fixed>float structures and therefore have a shorter duration.
A comparison to the equity forward dividend yields also helps:
Wells preferreds trade the tightest to the common, which serves to diminish their attractiveness in my opinion. You are giving up potential upside with the preferred, so the compensation ought to be a little better. Given the low yield on BAC's stock, the hurdle is lower and the preferreds yield more relative to common. Morgan Stanley continues to be interesting from this perspective.
I thought it might be helpful to look at the preferred and the equity of the two issuers over the last year in order to ascertain if the preferred has as much risk as many would surmise given the increase in interest rates (in the longer end of the curve).
Wells Fargo common versus the Series R preferred:
The Wells preferred is marginally lower and the common is marginally higher - even with the dividend differential, the common has outperformed.
Bank of America common versus the Series W preferred:
Hands down, the preferred has outperformed.
Bottom Line: While the new preferred stock by Bank of America and Wells Fargo might work for par sensitive investors, if you are willing to pay a premium, you can do better (within the sector). I continue to favor the fixed>float structure and believe that within this structure, Morgan Stanley is the most compelling.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.