U.S. Bank Credit Risk Increases as Wells Fargo Revenues Decline

The cost to protect U.S. bank debt climbed after Wells Fargo & Co. (WFC), the largest home lender, reported a decline in third-quarter revenue.

Credit-default swaps on Wells Fargo, based in San Francisco, added 11.9 basis points to 156.5 basis points, according to data provider CMA. Those tied to Goldman Sachs Group Inc. (GS) climbed 30.5 basis points to 368.8. A benchmark gauge of U.S. corporate credit risk rose the most in two weeks after a German government spokesman damped expectations for a swift resolution to the region’s debt crisis.

Traders pushed the contracts higher as Wells Fargo’s stock fell to $24.42, the biggest drop since August, after revenue fell to $19.6 billion from $20.4 billion in the second quarter, missing the $20.2 billion estimate of 20 analysts surveyed by Bloomberg. The average credit-default swap on the six biggest U.S. banks had climbed to 360 basis points on Oct. 4 on investor concern that bank margins are declining and that Europe’s sovereign debt crisis will infect balance sheets.

The increase in bank swaps is a “kneejerk reaction to the stock itself being lower,” said Rizwan Hussain, a credit strategist at Morgan Stanley (MS) in New York. “It’s going to be hard over the near term for the credit to go tighter when the stock is flat to lower, but you have an environment where even if you get the stock to stabilize and they’re perceived as dead money, you can actually see the credit side do better.”

Credit swaps on General Electric Co. (GE)’s finance arm General Electric Capital Corp. increased 30 basis points to 300. Contracts linked to Morgan Stanley, which pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, added 34 basis points to 425, and those tied to Bank of America Corp. (BAC) increased 25 to 390, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Index Climbs

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, gained 5.4 basis points to a mid- price of 135.4 basis points as of 5 p.m. in New York, according to index administrator Markit Group Ltd.

The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, climbed after Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, said at a news briefing in Berlin that European Union leaders won’t provide the quick ending to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

The U.S. credit gauge is down from a more than two-year high of 150.1 on Oct. 3 as optimism grew that Europe’s fiscal imbalances may be contained. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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