Royal Bank of Scotland and Halifax-Bank of Scotland were two of the biggest improvers in credit derivatives markets Monday morning even as shares in both tanked after the finalisation of the UK government plan to inject both groups with fresh capital.
The falling cost of protection for most leading banks and insurers in Europe helped the iTraxx investment grade index to rally sharply, taking 6.3 basis points of the spread to 131.8bp, according to data from markit Group. This mimicked the wave of relief that swept stock markets broadly in Europe, although the dilutive effect of the measures on RBS and HBoS shareholders saw their stocks pummelled.
However, RBS led the way in credit default swap markets with its cost of protection dropping about 44.5bp to about 144.2bp, according to Markit, which means it costs €144,200 annually to insure €10m worth of debt over five years. UBS was next, 31.3bp lower at 185bp, while HBoS followed 31.2bp tighter at 155.8bp.
Swiss Re and Barclays finished off the top five, with Deutsche Bank, Santander, Banco Espirito Santo, Credit Suisse, UniCredit and BBVA all in the top twenty.
For the UK banks the moves are too late to help their mean CDS spread over the year to October 7, which the government will use to set their cost of funds from the facilities in its schemes.
Analysts at Dresdner Kleinwort said the UK capital raising news in combination with announcements made by many European countries to support their banks in the form of capital injections or or guaranteeing their borrowings in various ways should bring some stability back in the system.
“We are not claiming that we have seen the trough in the market, as we need more confidence in whether the interbank loan market will start functioning again, but the actions today are supportive in our opinion,” they said.
There were some losers in the CDS markets, with Arcelor Mittal Finance the worst performer, 26.1bp wider at 467.5bp, and car industry names such as Continental, Daimler, BMW and VW also worse off.