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A Warning Flag on Bank of America, JPMorgan

Widening spreads on credit default swaps for Bank of America and JPMorgan in the past quarter illustrate growing market concerns about the health of both banks.



) -- While recent run-ups in the stocks might say different, widening spreads on credit default swaps related to

Bank of America

(BAC) - Get Bank of America Corp Report


JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

in the past quarter illustrate growth in market apprehension about the health of both banks.

Fitch Solutions, a Fitch Group-owned provider of data and analytics services, notes in a report Tuesday that CDS spreads widened by 32% for JPMorgan and 14% for Bank of America in the last quarter. Those figures compare to an average widening of 4% across all North American banks during the period.

Wider spreads indicate greater investor concern about the possibility of default. Fitch said CDS liquidity picked for both banks as well. While the spreads for both JPMorgan and Bank of America are still representative of very stable outlooks, the trend does show, according to Jonathan Di Giambattista, a managing director at Fitch who authored the report, that the CDS market is making "clear distinctions among names" within the banking sector. Although the percentage move isn't as great, the action in Bank of America seems more worrisome than that affecting JPMorgan from Di Giambattista's standpoint.

"Despite recent spread volatility, the market is still pricing JPMorgan in-line with AA-rated credits," said Di Giambattista in a statement. 'In contrast, BofA, is pricing in line with BBB- names while its high liquidity signals widespread uncertainty over future prospects."

Both JPMorgan and Bank of America are due to report their first-quarter results this week. JPMorgan is up first on Wednesday, and Wall Street is expecting a profit of 64 cents a share for the March period on revenue of $26.5 billion. Bank of America will follow before Friday's opening bell, and the average analysts' consensus estimate is for earnings of 9 cents a share on revenue of $28 billion.

The big banks are expected to show credit costs reached an inflection point in the first quarter, and the stocks in the group have

risen impressively

ahead of the reports, in part because of this optimism. The

KBW Bank Index

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, which contains twenty of the biggest U.S. banks, is up about 30% year-to-date. Shares of Bank of America and JPMorgan have jumped 24% and 11% respectively so far in 2010.

But although the housing market is generally considered to have stabilized, doubts have cropped up of late. Independent research firm


, for instance, said in late March it believes problems with residential mortgages, "especially high LTV

loan-to-value home equity loans, remain a significant headwind for large banks credit quality in 2010," and it listed Bank of America and

Wells Fargo

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as having the most exposure to this problem within the big names. The firm said JPMorgan was in the same boat but to a slightly lesser extent, and it viewed


(C) - Get Citigroup Inc. Report

as least exposed in this area.


estimates that a scenario where the big banks end up writing down 40% of home equity loans with an LTV of more than 100% -- meaning the borrowers owe more than the property is worth -- could result in a combined earnings hit of $33.2 billion for Bank of America ($7.4 billion), Citigroup ($3.4 billion), JPMorgan ($9.6 billion) and Wells Fargo ($12.8 billion).

Pressure from legislators and regulators on the big banks to keep a lid on foreclosures is also mounting, and that could lead to higher overall mortgage-related write-downs as well if principal reduction offers become widespread. The House Financial Services Committee is holding a hearing Tuesday with senior executives from Bank of America, Citigroup, JPMorgan and Wells Fargo in order to address what it termed "second-liens and other barriers" to reducing mortgage principals.

Barney Frank (D., Ma.),. who serves as Chairman of the House Financial Services Committee, sent a letter to the four CEOs of the big banks ahead of Tuesday's meeting that calls the holders of second-lien mortgages a "principal obstacle" to modifying mortgages, and urges the CEOs "in the strongest possible terms to take immediate steps" to write down second mortgages and let modifications take place.


Written by Michael Baron in New York