This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

JPMorgan Sees Parallel to Subprime Bust at Regional Banks

Stocks in this article: C BAC RF FITB WFC BBT

NEW YORK (TheStreet) -- A boom in leveraged loans issued by large and regional banks, or low-rated debt used to finance private-equity buyouts, is drawing alarming comparisons to the subprime mortgage boom in 2006 and 2007. According to one analyst, banks such as Regions Financial (RF), Fifth Third Bancorp (FITB), and Citigroup (C) are most at risk of getting caught up in the market froth.

Buffett's Buyout Business Is a Risk for Wells Fargo

Stein's Credit Bubble May Trump Bernanke Taper Talk

The warning call, made by JPMorgan analyst Vivek Januja, cited a surge in the issuance of leveraged loans in recent years and the prospect that deterioration in underwriting standards materializes as a risk for banks and investors in coming years. The quality of 2013 issues and those made in the first quarter of 2014 is solid. However, Januja said he foresees the prospect that investors may soon overreach.

"The boom in these loans has been fed by continued surge of inflows into leveraged loan funds. The genesis of this voracious interest is the search for yield, similar to the strong growth in subprime mortgages in 2006-2007," Januja said.

"Credit quality remains good currently, but an interesting shift bears watching -- the number of loan downgrades is up sharply and exceeded upgrades in 2013 for the first time since 2009 and downgrades in 1Q14 are already at about double the pace of 2013," he added.

A rise in ratings downgrades to leveraged loan securities could present a risk for banks that have grown their share in the market in the past 12 to 18 months, Januja said. For some regional banks, leveraged loan volumes have risen three-to-fourfold over the past few years, while the nation's largest banks have also rapidly increased their issuance amid booming LBO markets.

The analyst sees those risks as most acute at Fifth Third, which has grown its leverage loan syndication volume to $5.3 billion in 2013 from $1.2 billion in 2011, and at Regions Financial, which grew volumes to $4.5 billion from $1.9 billion over that same time period. In the first quarter of 2014, Fifth Third grew its leveraged loan syndication volume 42%, according to Januja's calculations, while Regions grew volumes 24% year over year.

Among large banks, Citigroup has stepped up its leveraged loan issuance the fastest, with volumes rising 74% from 2011 to 2013, and LBO underwriting fees the fastest among large banks. Bank of America (BAC) and Wells Fargo (WFC) have also seen issuance rise 30% year over year, with leveraged loan fees accounting for 33% to 38% of their underwriting fees, according to Junuja's calculations.

It is worth noting that JPMorgan analyst Januja's figures indicate his firm has been the biggest issuer in 2014 and in recent years. In 2013, JPMorgan participated in two of the biggest leveraged loan deals, the buyouts of Dell and Heinz.

Januja highlighted BBT (BBT) as the lender that has been "by far the most cautious, with a de minimis amount of leveraged loans." BBT has not participated in a single leveraged loan deal in 2014, according to JPMorgan's figures.

Overall, leveraged loan volumes grew to $1.1 trillion in the U.S. in 2013, surpassing the trillion-dollar mark for the first time since the crisis. In 2014, leveraged loan issuance represented 50% of total syndicated loans.

The Fed Steps In

Last March, the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. provided guidance on leveraged loan underwriting standards. Those regulators indicated banks should avoid financing deals with debt ratios of beyond six times earnings before interest, taxes, depreciation and amortization, and have more concrete rules about underwriting standards.

Januja, the JPMorgan analyst, said he believes higher scrutiny of leveraged loan issuance could lower underwriting fees for large banks, shift deals to non-bank lenders, make the low-rated tranches hard to sell and become a key point of focus during the Fed's annual stress testing review.

It is worth noting that Citigroup, one of the fastest growing leveraged loan issuers, failed this year's stress tests.

-- Written by Antoine Gara in New York

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs