Preferred stocks see considerable drop as week starts; European bank paper takes big hit

By Stephanie N. Rotondo

Seattle, Feb. 8 – The preferred stock market was getting “hammered” in Monday trading, according to a trader, led by European bank issues.

“There are plenty of fund outflows,” the trader said. “European banks are getting hit the hardest.”

Driving the decline was “fear,” the trader said, particularly about Deutsche Bank AG.

“Their CDS is going through the roof,” he said. “Everybody is worried about leveraged loan exposure to oil and gas.”

Concerns about depressed oil prices – and its effect on global growth, particularly in China – have also increased fears about “counter-party risk and interconnectedness,” the trader noted.

“European banks are getting hammered like crazy,” remarked another market source. He, too, noted “concerns about credit risk.

“A lot of them have sizable exposure in Asia,” he added. And while there is not as much direct exposure to oil and gas, how that plays into growth does factor in.

Even domestic banks are undergoing a “reassessment of risk,” the source said, though by comparison, they have fared much better than their European peers.

“Things look pretty good from a credit perspective,” the source said of the U.S. banking system.

The source conceded that there is a feeling that the day’s declines – to say nothing of the weakness that has pervaded the market since the start of the year – are a bit overblown. Still, he also understood the market’s reaction, harkening back to the old investor adage, “I don’t want to be the one to catch the falling knife.”

“What really drives securities pricing is fear and greed,” he commented. “We are in the fear part of that now.”

The Wells Fargo Hybrid and Preferred Securities index dropped 166 basis points by the end of the session. That was a slight bounce back from the day’s lows but a wider loss than was seen at mid-morning.

Banks lead the declines

Given the tone of the market and what was driving it, European bank preferreds dominated trading activity on Monday.

For instance, Deutsche Bank’s 7.6% TruPs (NYSE: DTK) traded about 1.55 million times on the day, falling 71 cents, or 3.11%, to $22.15. The preferreds were down $1.15, or 5.03%, at $21.71 at mid-morning.

The 8.05% TruPs (NYSE: DKT) meantime dropped 74 cents, or 3.16%, to $22.70. That compared to losses of $1.24, or 5.29%, earlier in the day.

About 1.17 million shares of that issue traded.

Barclays Bank plc’s 8.125% non-cumulative preference shares (NYSE: BCSPD) declined 36 cents, or 1.41%, to $25.14. That issue was exchanged over 1 million times during the day.

Trading in domestic banks was relatively liquid for the day as well, though it did pale in comparison to trading in European banks.

Bank of America Corp.’s 6.2% series CC noncumulative perpetual preferreds (NYSE: BACPC) traded about 775,000 times, losing 18 cents to close at $25.14. Wells Fargo & Co.’s 5.7% series W class A noncumulative perpetual preferreds closed down 19 cents, falling under par at $24.88. That issue traded about 595,000 times.

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