(Bloomberg) -- Credit investors are unconvinced about the ability of the world’s weakest lenders to weather a coronavirus economic slowdown, according to Bank for International Settlements.
The cost of insuring debt from lower-rated banks is yet to fully recover from a virus-fueled blowout, with spreads on credit default swaps tied to high-yield lenders an average of 127 basis points above pre-pandemic levels as of Aug. 21, BIS said in report published on Monday. CDS spreads for BBB tier banks were 30 basis points wider.
Concern in CDS markets reflects “uncertainty about the evolution of the pandemic and the underlying quality of banks’ assets,” BIS economist Bryan Hardy wrote in the report. “The full extent of economic damage from the pandemic will play out in the longer term, and losses may take time to fully materialize.”
Investor caution toward banks contrasts with policy makers, who view the industry as part of the solution to the economic downturn, rather than as part of the problem, Hardy said. Spreads on CoCos, the riskiest form of bank debt, are also still wider than in February, trailing a bounce back for more senior bonds.
In general, bank funding costs have “largely recovered” since March, reflecting robust monetary policy support and positive sentiment in debt markets, according to the BIS. Credit investors also valued measures to preserve capital, including dividend suspensions.
Spreads on euro senior bank bonds have tightened to about 98 basis points, only about 20 basis points wider than levels in February prior to the sell-off, according to a Bloomberg Barclays index. Dollar bank bond spreads have also retraced much of their widening.
Spreads CoCos or Additional Tier 1s, issued mainly by European banks, are still nearly double their pre-Covid levels, BIS said. This reflects “concerns over possible coupon cancellations from payout restrictions,” Hardy wrote.
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