The Securities That Banks Are Backing Away From: Credit Weekly

US banks are increasingly retreating from issuing preferred shares, following JPMorgan Chase & Co.'s lead, despite strong investor demand for these securities. This trend is exemplified by Capital One Financial Corp.'s recent $500 million preferred share redemption, which has contributed to a net shrinkage of the market this year. If sustained, this marks the second consecutive year of contraction for the US bank preferreds market, a trend not seen since the post-Global Financial Crisis capital restructuring.

Analysis

A significant shift is underway in the US bank preferred shares market, characterized by a deliberate reduction in outstanding securities despite strong investor appetite. Following the lead of JPMorgan Chase & Co., other institutions like Capital One Financial Corp., which recently redeemed a $500 million preferred share, are contributing to a net contraction of the market this year. If the current trajectory continues, it will represent the second consecutive year of market shrinkage, a dynamic not witnessed since the post-Global Financial Crisis period when banks were systematically replacing obsolete capital instruments. This growing supply-demand imbalance, where fewer securities are available to meet eager investor demand, is a critical technical factor that could influence pricing and yields for the entire asset class.

Key Decisions for Investors

• Investors holding existing bank preferred shares may benefit from price appreciation due to the shrinking supply and persistent demand, making a 'hold' stance on high-quality issues potentially advantageous.
• For those seeking new exposure, the decreasing net supply suggests that new issuance will be scarce and likely met with high demand, requiring investors to be prepared for higher prices in the secondary market or to act decisively on any new offerings.
• Consider the underlying reason for this trend; while bullish for existing preferred prices, the redemptions signal that banks may be finding more efficient capital sources, which could be a positive credit signal for their common equity and senior debt.