Barclays’ $14.83 million contingent yield autocalls on BofA, JPMorgan, Citi offer tactical bet

By Emma Trincal

New York, June 17 – Barclays Bank plc’s $14.83 million of contingent income autocallable securities due Dec. 15, 2022 linked to the common shares of Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. are designed for income-seeking investors with a moderately bullish view on bank stocks.

If the least-performing shares close at or above the downside threshold level, 50% of the initial share price, on a quarterly determination date, the notes will pay a contingent payment that quarter at an annualized rate of 12.65%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus the contingent coupon if the least-performing shares close at or above the initial share price on any quarterly determination date other than the final determination date.

If the least-performing shares finish at or above the downside threshold level, the payout at maturity will be par plus the final contingent coupon. Otherwise, investors will lose 1% for every 1% that the final share price of the least-performing shares is less than the initial share price.

Laggard

“Bank stocks have gone through a big sell-off, and while they rallied in the spring like the rest of the market, they have yet to recoup all of their losses,” said Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

“Many investors are betting they could outperform on the way up.”

Financials is the second worst-performing sector after energy.

The Financial Select Sector SPDR exchange-traded fund, which tracks the performance of big financial institutions – the three notes’ underliers make for a quarter of the fund’s assets – is still down nearly 23% from its high in February. Meanwhile the S&P 500 index is only 7.7% lower than its February high.

Sideways view

“Many people have exposure to banks and financial stocks. Getting into a note linked to bank stocks can be both a tactical play and a way to generate income in this market,” he said.

Investors buying autocallable contingent coupon notes are not bullish by nature. They’re just hoping that the underlying will stay within the range comprised between the barrier and the coupon rate, he explained.

“If rates continue to be low, and it looks like the Fed intends to keep them low for a very long time, it’s going to be detrimental to banks. Big banks with large lending business capabilities are going to get hurt.”

It remains unclear whether the 50% barrier could be breached as a result. But the price of bank stocks is likely to trade range bound for the next couple of years, he said.

“Back a few months ago you had 75% barriers. Not anymore. Volatility is higher now and people demand deeper barrier, around 60% or 50% to insulate them from the risk.

“In my view, a 50% barrier for these big names should address the issue of downside protection.”

Tactical bet

Rosenberg said that regulations have improved the stability of the U.S. financial system.

“Although growth for banks may be slow, at least and since the financial crisis and the resulting reforms, our financial system is strong. Big banks are healthy,” he said.

“Banks are poised to recover better than other segments in the market.”

“Tech” stocks are among the most popular underlying stocks in autocallable structures, he said.

But financials come closely after.

“Financials is the other tactical sector people are looking to get exposure to when buying these income-generating products,” he said.

“Income notes with double digit coupon, highly correlated underlying stocks make sense for people afraid of a market downturn.”

Risky business

Dick Bove, chief financial strategist and bank analyst at Odeon Capital Group, had a different point of view.

“I think it’s a bad bet,” he said.

“In order to keep on getting paid, the three stock prices have to stay within that par minus 50% band. If they do, you’ll pick up a well above normal yield, but if you don’t, you don’t get your income.

“And at maturity, you could lose half of your investment or more if any of those three drops 50%. Can it happen? Absolutely.”

For Bove, banks are going through difficult times due to the severity of the Covid-19 disruptions and lockdowns, which have negatively impacted the economy.

“Bank of America last week said that 25% of their small business customers are out of business,” he said.

“They’re going to lose substantial amounts of money. What’s going to happen to the price of their stock?

“You’re betting that two-and-a-half years from now neither JPMorgan, Bank of America nor Citigroup is going to trade 50% lower that today? How can you tell? I don’t think it makes sense.

“Citi could easily breach that level.

“You’re doing this at the worst time for banks since the Great Recession.

“I don’t think it’s a good idea.”

Barclays is the agent. Morgan Stanley Wealth Management is the selected dealer.

The notes settled on Wednesday.

The Cusip is 06747H396.

The fee is 2.5%.

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