Bank CDSs drop to pre-Lehman levels

The cost of credit protection on a number of US and European financial institutions has returned to levels recorded prior to the collapse of Lehman Brothers on September 15.

Market sentiment towards US banks has improved significantly; credit default swap (CDS) spreads referencing Merrill Lynch reached 118.1 basis points at the close of trading on January 7, having finished 2008 at 155bp. On September 12, the last trading day before the Lehman bankruptcy announcement, spreads on the bank were at 455bp. The bank's CDS spreads are now only slightly wider than those of its parent Bank of America, which closed its takeover of Merrill Lynch on January 1, saw its CDSs tighten slightly to 112.9bp from 117.3bp at the end of 2008, down from 156.2bp on September 12.

Similarly, CDSs on Wachovia tightened to 115.5bp from 127.5bp on December 31 and 429.6bp on September 12. Spreads are now at the narrowest since May 6 when they were 105.3bp. The cost of credit protection on Wells Fargo, which now owns Wachovia, fell to 111bp from 122bp at the end of December and 149.6bp on September 12.

The trend was continued across the financial sector and around the world:

• Spreads on Citi moved in to 176.5bp from 189.1bp on December 31 and 187.6bp on September 12.

• Since the beginning of January, the cost of credit protection on JP Morgan has dropped to 112.3bp from 119.3bp on December 31 and 144bp on September 12.

• CDS spreads referencing former investment bank Goldman Sachs have tightened to 250.8bp from 290.4bp since the beginning of the year, though they remain significantly wider than the 197.9bp recorded on September 12.

• Morgan Stanley saw CDS spreads reach 354bp, considerably wider than the 261.9bp recorded on September 12, but in from the year end figure of 401.5bp.

• In the UK, spreads on HBOS reached 88bp on January 7, in from 114.1bp on December 31 and the lowest figure since the 85bp recorded on May 19. On September 12, CDS spreads on the bank reached 246.7bp. The cost of credit protection on Lloyds TSB, set to merge with HBOS, dropped to 83.7bp, in from 103.7bp at the end of December and 96.7bp on September 12.

• CDSs on RBS tightened to 97.8bp on January 7 from 121.3bp at the end of 2008 and 123.2bp on September 12.

• The cost of credit protection on Barclays was also lower, falling to 130.8bp from 159.1bp on December 31 and 132.6bp on September 12.

• HSBC saw spreads move in to 78.4bp from 93.5bp, though they remained wider than the 71bp recorded on September 12.

• Spreads on French bank BNP Paribas moved in to 53.7bp from 69.9bp on December 31 and 64.3bp on September 12.

• CDSs on Société Générale tightened to 84.2bp from 98.5bp on December 31 and 94.2bp on September 12.

• Credit Agricole also saw spreads tighten significantly, to 60.9bp from 79.6bp at the end of December and 98.5bp on September 12.

• Since the beginning of the year the cost of credit protection on Deutsche Bank narrowed to 114.6bp from 134bp, but remained significantly higher than the 83bp recorded on September 12.

• Commerzbank saw CDSs move in to 67.8 from 84.9bp on December 31 and 83bp on September 12.

• Spreads on Swiss firm UBS were at 198.2bp down slightly from 200.9bp on December 31, but significantly wider than the 136.4bp recorded on September 12.

• Dutch financial services firm ING saw spreads move in from 117bp on December 31 to 100bp on January 7, only slightly broader than the September 12 figure of 99.7bp.

• CDSs referencing Credit Suisse still remain far wider than the 88.8bp recorded on September 12, though spreads did drop from 182.7bp on December 31 to 154.8bp on January 7.

See also: CDSs tighten on automakers, sovereigns