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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Mar 13

Written by: Donald van Deventer
3/13/2014 12:41 PM 

In a recent note we compared the market’s view of the capital strength of Bank of America Corporation (BAC), Citigroup Inc. (C), and JPMorgan Chase & Co. (JPM). In today’s note, we expand the analysis to a ranking of all deposit-taking financial institutions which had daily trading volume of $1,000,000 or more in any bond issue on March 12, 2014.  We do not include institutions for whom the primary source of funds is the capital markets, instead focusing on “banks” in the deposit-taking sense of the word. Canadian and Australian banks dominate the list.

Conclusion: Using 1,772 trades on 166 bonds with a daily trading principal amount of $1,256,122,000 on March 12, the major financial institutions trading with the narrowest credit spreads are Toronto Dominion Bank (TD), Citigroup (C), Royal Bank of Canada (RY), National Australia Bank (NABZY), and U.S. Bancorp (USB). Wells Fargo & Co. (WFC) and JPMorgan Chase rank next best among U.S. financial institutions.

The Market Risk Ranking

The 30 largest U.S. bank holding companies have submitted their Comprehensive Capital Analysis and Review 2014 stress tests to the Federal Reserve as this analysis is being written.  The major banks in the United States are spending tens of millions of dollars to analyze the banks’ ability to avoid default over 13 quarters and three scenarios for 28 macro-economic factors specified by the Federal Reserve.  There is an alternative way to compare the capital strength of major financial institutions that avoids the well-known problems of legacy credit ratings and the highly concentrated trading in credit default swaps, 75% of which is among dealers and 87% of which is concentrated at a five year maturity.  A superior alternative is to use traded bond prices of the major financial institutions in order to extract a market view of the capital adequacy of the banks. 

This analysis uses the bond traded information described above for 24 major financial institutions around the world, including 12 from the United States.  All trades took place on March 12, 2014. This analysis differs from the CCAR 2014 stress testing process in a number of important dimensions:

  • The market risk assessment is based on investments of $1.26 billion by institutional investors.  The bankers doing the CCAR 2014 analysis have somewhat less at stake.
  • The market risk assessment is predominately an arms-length assessment, while the banks’ CCAR 2014 analysis is a self-assessment with the same potential concerns associated with the self-assessment published annually by legacy rating agencies.
  • The market risk assessment is based on all possible scenarios, not just the 3 CCAR 2014 scenarios
  • The market risk assessment includes maturities out to 2044 (the maturity of the longest maturity bond traded was February 1, 2044), while the CCAR analysis is available for 13 quarters.
  • The market risk assessment is completely transparent, as the traded bond prices are public information
  • The market risk assessment is “model independent,” as no explicity default probability models or parameter assumptions are made as part of the analysis.

As our comparison of Bank of America, Citigroup, and JPMorgan Chase showed clearly, credit spreads can vary dramatically with maturity.  In this study, with bonds trading at multiple maturities for most of the banks, we took the short cut of ranking the banks by the best credit spread on any of their bond issues which traded more than $1 million on March 12.  This of course favors institutions with shorter maturities of bonds outstanding.  A more detailed analysis would compare all the institutions at all maturities, but we postpone that for a later study. The financial institutions whose bond trades were had the lowest spread are listed here:


Other U.S. banks included in the ranking are Capital One Financial Corporation (COF), State Street Corporation (STT), Bank of America, Comerica Inc. (CMA), BB&T Corporation (BBT), PNC Financial Services Group Inc. (PNC), Keycorp (KEY), and Zions Bancorporation (ZION). No other major U.S. deposit-taking institutions had bond trades with more than $1 million in volume on March 12.

Calculation of Credit Spreads

The underlying U.S. Treasury yields used to calculate credit spreads are taken from the Federal Reserve H15 statistical release and interpolated by Kamakura Corporation to match the exact maturity date of each bond.  This matched maturity U.S. Treasury yield is subtracted from the trade-weighted average yield for each bond on March 12, 2014. 

We now turn to the market risk assessment of the 24 financial institutions.

Ranking by Credit Spreads

We first rank the institutions by credit spread, where lowest credit spread is judged “best.”  The lowest credit spread of all of the trades was 0.086%. The highest credit spread was 2.99%, and the median credit spread was 0.59%.  The average of all credit spreads was 0.68%. The bond trades with the lowest credit spreads are shown here, with only the best bond for each institution shown. U.S. banks are shown in bold type:

The trading volume of bonds used in the ranking is shown here, arranged in alphabetical order by name of the issuing legal entity.  Some institutions issued through more than one legal entity, so the “best bond” for all related entities was selected.

Next, we report all of the bond trades used in this analysis, ranked by credit spread.

The first 50 bond issues are shown in the next chart.

Bonds which ranked from 51 to 100 are shown in the next chart.

The third block of bonds, those which ranked from 101 to 150, are shown in the chart below.

The 16 bond issues with the highest credit spreads are listed in this chart.

For more information on this analysis, please contact the author.

Author’s Note

Regular readers of these notes are aware that we generally do not list the major news headlines relevant to the firm in question. We believe that other authors on SeekingAlpha, Yahoo, at The New York Times, The Financial Times, and the Wall Street Journal do a fine job of this.  Our omission of those headlines is intentional.  Similarly, to argue that a specific news event is more important than all other news events in the outlook for the firm is something we again believe is inappropriate for this author.  Our focus is on current bond prices, credit spreads, and default probabilities, key statistics that we feel are critical for both fixed income and equity investors.