Wells Fargo Breaks From Pack in Swaps
Wells Fargo & Co.’s perceived creditworthiness is rising relative to peers at the fastest rate in almost three months as investors reward the bank for limited risk from mortgage litigation and the European debt crisis.
Credit-default swaps tied to the bonds of the San Francisco-based lender have held steady in February as contracts on JPMorgan Chase & Co. (JPM) and other banks climb, according to data provider CMA. The difference, 112 basis points, has more than doubled since August.
Concern is growing that Europe’s credit crisis, costs tied to faulty mortgages and pending regulation of proprietary trading will damage bank balance sheets. Wells Fargo has had fewer costs in the mortgage crisis than JPMorgan on an absolute basis and as a percentage of assets, according to data compiled by Bloomberg.
“Wells Fargo looks like a much more stable business, almost like an industrial company,” George Strickland, who helps oversee about $12 billion in fixed-income assets at Santa Fe, New Mexico-based Thornburg Investment Management Inc. said in a telephone interview. “They’re much more of a commercial bank. They didn’t get caught up in the mortgage fiasco as much as the other banks and they also aren’t nearly as involved in the capital markets as the others.”
While credit-default swaps on Wells Fargo, which investors use to hedge against losses on the company’s debt or to speculate on creditworthiness, have climbed to 110 basis points since this year’s low of 95.5 basis points, contracts tied to its peers have risen faster, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The gap between Wells Fargo swaps and the average of those linked to the six biggest U.S. banks, including Bank of America Corp., JPMorgan, Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley (MS), widened to 112 basis points yesterday, compared with 42 basis points at the beginning of August and 23 basis points this time last year.
That difference, which grew to as much as 180.8 basis points in October as Greece’s debt woes roiled markets, grew 22.3 basis points for the two weeks ended Feb. 15, the fastest since Nov. 25, the data show. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bond investors are accepting the lowest interest rates from Wells Fargo, among the six biggest U.S. banks. Its debt yields to 2.85 percent, Bank of America Merrill Lynch index data show. JPMorgan debt yielded 3.53 percent and Goldman Sachs 4.73 percent as yesterday, the data show.
“The view that they are very domestic-focused is helping, so the improving U.S. economy benefits them and they have less exposure to the rest of the world,” said Peter Tchir, founder of TF Market Advisors in New York. “Markets are getting concerned about bank trading desk ability to generate revenue as Dodd-Frank is on the horizon,” which doesn’t impact Wells Fargo in the way it does Morgan Stanley, Goldman Sachs, Citigroup, or Bank of America.
Little Sovereign Risk
Wells Fargo had $3.2 billion of exposure to Europe, of which “very little” is sovereign risk, Chief Financial Officer Timothy J. Sloan said in a July 19 teleconference to discuss earnings with analysts and investors. The six biggest U.S. banks had $50 billion in risk tied to five troubled nations of Europe on Sept. 30, according to Fitch Ratings.
Against JPMorgan, the Wells Fargo swap contracts have diverged by the most since November 2008 this week, reaching 19.7 basis points on Feb. 13, CMA data show. Credit swaps, which typically decline as investor confidence improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Moody’s Investors Service said yesterday it was reviewing 17 banks and securities firms with global capital markets operations for downgrades, including Morgan Stanley, Goldman Sachs (GS), JPMorgan, Citigroup, and Bank of America. Wells Fargo is not under review. The ratings company cited “more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions.”
Banks may suffer as financial reform crimps profits and funding costs become increasingly sensitive to investor confidence, Moody’s said. U.S. regulators are planning to implement a ban on proprietary trading in five months called the Volcker rule, part of the Dodd-Frank financial regulation overhaul.
The potential downgrades may raise borrowing costs and force banks to increase collateral, and bank funding costs have already climbed worldwide. Moody’s downgraded Bank of America and Wells Fargo in September, when it said the possibility of emergency government support had decreased.
With European financial leaders struggling to bail out Greece, the mortgage overhang unresolved and capital markets volatile, “there is still a healthy degree of skepticism across the group,” Andrew Marquardt, an analyst at New York-based Evercore Partners Inc., said in a telephone interview. “Of the big banks, Wells is the one that gives investors the greatest amount of comfort in this very uncertain time.”
Costs from faulty mortgages and shoddy foreclosures have topped $72 billion at the biggest U.S. banks through the end of last year. JPMorgan accounts for about $18.5 billion, or 0.8 percent of its assets at the end of last year, while Wells Fargo is about $6 billion, or 0.5 percent, Bloomberg data show.
“Wells Fargo has managed through the housing situation very well, they have less global capital markets exposure, and therefore European risks and concerns, than JPMorgan,” said David Brown, a money manager who helps oversee $88 billion of fixed-income assets at Neuberger Berman LLC in Chicago. “JPMorgan has more capital markets exposure. Some of that’s out of their control, and they’re just being a little bit subject to the volatility there.”