U.S. Bank Credit Risk Climbs

Posted: October 18, 2011 in TheProblem
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Credit-default swaps on U.S. banks climbed on concern that the slowing economy was weighing on financial institutions’ balance sheets after Goldman Sachs Group Inc. (GS) reported its second quarterly loss in 12 years.

Contracts protecting the debt of the New York-based company increased 6 basis points to a mid-price of 375 basis points at 9:45 a.m. in New York, according to broker Phoenix Partners Group. Contracts on Bank of America Corp. (BAC) climbed 23.5 basis points to 413.5 as of 8 a.m., according to data provider CMA.

“Market concern over the continued impact of a slow economic recovery is intensifying pressure on BofA and Goldman,” Diana Allmendinger, research director at Fitch Solutions in New York, said in a statement. In the past three months, swaps on Bank of America have widened more than 100 percent and those on Goldman Sachs 126 percent, according to Fitch.

Investors pushed bank credit swaps higher after Goldman Sachs reported a third-quarter loss of $393 million, or 84 cents per share, compared with a profit of $1.9 billion, or $2.98, a year earlier, and Charlotte, North Carolina-based Bank of America had net income of $6.23 billion, or 56 cents a diluted share, skewed by one-time pretax gains including $4.5 billion in fair-value adjustments of structured liabilities and $1.7 billion tied to changes in value of the company’s debt.

Average Climbs

Credit-default swaps on the six biggest U.S. banks had climbed to an average of 360 on Oct. 4 on concern that bank margins are declining and that Europe’s sovereign debt crisis will infect balance sheets, before falling as low as 248 on Oct. 12, according to CMA. The average increased to 294 basis points yesterday.

A benchmark gauge of U.S. corporate credit risk also rose, climbing to a one-week high, on concern that Europe’s debt crisis may spread after Moody’s Investors Service signaled that France’s Aaa credit rating is under pressure.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.7 basis points to a mid-price of 136.2 basis points at 9:54 a.m. in New York, according to index administrator Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, rose to the highest level since Oct. 10. The gauge reached 150.1, the highest in more than two years, on Oct. 3 as investors wagered that European leaders may fail to contain the region’s fiscal strains.

Moody’s said yesterday that France’s debt metrics are deteriorating, and cited the potential for additional liabilities from the region’s sovereign debt and banking crisis.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Editors: John Parry, Pierre Paulden


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