Bank Debt Risk Drops as Funding Costs Match Top-Rated Companies

Banks’ credit risk fell for a third day as the unlimited cash that European leaders pumped into lenders pushed their borrowing costs down to the same level as the best-rated companies for the first time in 2 1/2-years.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers dropped four basis points to 177 basis points at 3:50 p.m. in London after reaching a 14-month low of 175. The yield premium on bank bonds relative to German state debt narrowed to 134 basis points, the same as company notes, Bank of America Merrill Lynch data show.

The European Central Bank’s efforts to save the euro including cheap loans for euro-region lenders are helping bolster banks’ balance sheets and win back investor confidence. Banks and insurers led by Allianz SE (ALV) and Credit Agricole SA (ACA) raised 5.7 billion euros ($7.4 billion) from bonds in the busiest week of sales by financial firms in more than a month, according to data compiled by Bloomberg.

“There is an overall boost as the market recognizes the improvements in banks’ balance sheets and their funding requirements decline,” said Roger Francis, an analyst at Mizuho International Plc in London. “However, looking at averages conceals sound conditions in core Europe and continued weakness in other areas.”

Spread Shrinks

The yield premium on Europe’s banks is the lowest since April 2011 and is half the spread at the start of the year, according to Bank of America Merrill Lynch’s EUR Corporates, Banking index. Until November 2009, bank spreads were typically less than those on non-financial companies, the index data show.

Yield spreads on bonds of lenders in the euro area’s periphery such as Spain and Italy have also narrowed, though the gap is still about 415 basis points more than benchmark rates, according to Bank of America Merrill Lynch’s Euro Periphery Financial index.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings declined three basis points to 126. A fall signals improvement in perceptions of credit quality. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 11 basis points to 535, the lowest since Oct. 5.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Italy’s biggest utility Enel SpA (ENEL) and Telecom Italia SpA (TIT) led price fallers among investment-grade corporate securities this week. Enel’s 5 percent bonds due 2022 fell 1.9 percent, the biggest weekly drop in Bank of America Merrill Lynch’s EMU Corporates index, while Telecom Italia’s notes maturing 2022 slid 1.6 percent.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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