Royal Bank of Scotland preferreds fall 8%-12% on European worries; Bank of America falls too

By Stephanie N. Rotondo

Portland, Ore., July 18 - The preferred stock market was "not pretty," a trader said Monday, as more fears about Europe pressured the market.

"Everything is just getting whacked," a trader said about mid-day. United Kingdom-based banks in particular were getting hit as investors worried about "bank exposure to foreign countries."

"Among the biggest losers were U.K. banks," said another market source.

Royal Bank of Scotland Group plc was the biggest loser of the day. Several series of its preferreds dropped 8% to 12% during the session. The massive sell-off in the paper was attributed in part to "fallout from the stress tests" released on Friday - RBS passed, but just barely - and in part to questions about the bank's creditworthiness.

A source opined that the losses might be a little much.

"Clearly, RBS took it on the chin more than others," he said.

Among U.S. banks, Bank of America Corp. preferreds fell - though not nearly as much as RBS - on speculation that the bank might have to raise as much as $50 billion to rebuild its capital cushion.

RBS plummets 10% plus

Royal Bank of Scotland's series G preferreds (NYSE: RBSPG) fell $1.65, or 12.27%, to $11.80 on volume of 1.43 million preferreds.

The series Ts (NYSE: RBSPT) dipped $1.49, or 8.23%, to $16.61, while the Qs (NYSE: RBSPQ) dropped $1.70, or 10.12%, to $15.10.

The series E preferreds (NYSE: RBSPE) were the day's biggest loser on a percentage basis. They declined $1.71, or 12.57%, to $11.89.

"It's pretty severe," a source said about the recent sell-off.

RBS passed a second round of stress tests by the European Banking Authority, but the source said there are still "serious credit questions" about the bank and its exposure to the European debt crisis.

Those worries in turn leave investors wondering if some of the preferreds that are currently non-paying will have their dividends turned back on in 2012.

"If you're not getting paid and you are buying with the expectation [that the dividend will be reinstated in 2012] and then there comes these questions about whether or not they will," panic ensues.

On top of that panic, the source said there was a "very negative" article in Barron's over the weekend that "basically said they would not have enough bank capital [to deal with the European crisis]." Still, the source said that the author's assumptions were "very aggressive" and not necessarily accurate.

"RBS preferreds are so far out of whack," the source said. "The reality is we've been scratching our heads a bit."

He added that the losses might be due to "over-selling due to a panic at this point."

Bank of America takes a hit

The weaker market combined with speculation that Bank of America might have to raise another $50 billion of capital weighed on the bank's preferreds, according to traders.

The Bank of America Merrill Lynch series Qs (NYSE: BMLPQ) dropped 22 cents to $26.05, while the series H depositary shares (NYSE: BACPH) fell 34 cents to $25.25.

On June 29, the Charlotte, N.C.-based bank said it could report as much as $20.4 billion of expenses related to distressed home loans. That has caused many to wonder if the company can make good on its promise to raise dividends in the near term.

Bank of America posts second-quarter earnings on Tuesday.

In order for the bank to be compliant with the new Basel III regulations, market watchers have estimated that it needs at least $50 billion of new capital to cover the risk-weighted assets.

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