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Morning Commentary: Preferred stock space little fazed by better-than-expected bank earnings
By Stephanie N. Rotondo
Seattle, April 13 – Bank earnings season started with a bang on Thursday as J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. all announced results that mostly beat expectations.
However, given the holiday, trading in those names was limited at mid-morning and the preferreds were mostly lower.
“On the bright side, we are hearing a pick-up in the calendar after Easter and with banks getting through earnings,” a trader said.
With all of the “pent-up demand” for new paper, the trader opined that “now is a good time” to bring $25-par preferreds versus $1,000-par hybrid paper.
In particular, JPMorgan, Wells Fargo or Citigroup could be first to tap the market.
“I’m dying for Citi to bring something,” the trader said. Citi, for its part, has a 5.8% series C noncumulative preferred issue (NYSE: CPrC) that is “getting quite rich,” trading with a 5.65% strip yield.
“There are banks with better credit profiles that aren’t trading as wide,” he said.
But it’s not just banks that should take advantage, the trader said. There are many issuers that have high-coupon issues that are – or soon will be – callable.
Take, for instance, First Republic Bank’s 5.625% series C noncumulative preferreds (NYSE: FRCPrC).
“They have been around a long time,” the trader pointed out, as the paper was issued on Nov. 15, 2012. At the end of 2017, the issue becomes callable.
Therefore, it is a “great joke” that the issue was just slated to be added to the S&P U.S. Preferred Stock index. That news resulted in the shares hitting a negative yield to call.
“So you are now locking in a loss,” the trader said.
As such, First Republic should seriously consider calling the deal and replacing it, he said.
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