Bank Stock Performance – December
In December, public banks stocks generally improved and out-performed the S&P 500 after a month of pricing volatility in which bank stocks declined mid-month then rallied up toward month end to ease on light trading activity on December 31, 2014. The largest financial institutions saw a 4.7% improvement during the month while the smaller banks edged ahead slightly. The SNL Bank Index grew 2.4% in December, well above the S&P 500 which dropped 0.4% on light year-end trading with banks below $500 million edging up at 0.7% during the month.
The banking sector continues to face regulatory pressures and continued pressure on net interest margins in today’s low interest rate environment, with the shape of the yield curve continuing to flatten during the quarter, as short-term interest rates rose relative to intermediate and longer term rates. By the end of the fourth quarter, the yield on the benchmark 10-year U.S. Treasury ended up much lower than where it began, dropping to 2.17% from 2.49% on September 30, 2014.
A review of 2014 highlights price volatility in the banking sector. After a positive start to the year, the SNL Bank stock index dropped into negative territory as equities sold off sharply due primarily to fears of slower growth in emerging markets along with concerns about the global economy. Market losses accelerated as fears grew over a broader capital flight from emerging markets due to potentially higher long-term interest rates in the U.S. and declining liquidity as the Federal Reserve reduced its asset purchases. In February emerging markets calmed and investors turned their focus to corporate earnings despite mixed U.S. economic data and the SNL Index rebounded in to April. During the second quarter, the U.S. economic landscape remained mixed after the effects of severe weather continued to linger. The estimate of first quarter gross domestic product (“GDP”) was reduced to a negative 2.9%, reflecting a broad-based contraction in many areas of the economy, including consumer spending, exports and business investment. During August, performance began to improve which coincided with a continued positive trend in economic data. However by September investors were faced with various concerns including the prospect that the Federal Reserve would eventually need to begin raising interest rates, and likely sooner than anticipated, slowing growth in China and concerns over ISIS. The fourth quarter began on a negative note, with most major indices declining notably in the first two weeks of October. The concerns about the global growth outlook and the end of the Federal Reserve’s asset purchase program were the primary culprits. However, continued improvement in domestic economic data, the ongoing decline in oil prices, and positive seasonal trends all contributed to an explosive rebound in Mid-October. The rally continued through November, partly as a result of investor encouragement with the results of the mid-term elections, as well as the better than expected employment report.
Over the past twelve months, the Bank SNL Index lagged the S&P 500 growing by 9.7% compared to the S&P 500 increasing 11.4%. The smallest banks, those below $500 million, were the most competitive growing 11.2% while banks between $1 billion and $5 billion were the least competitive growing 2.6% and remained in negative territory the majority of the year. Banks between $500 million and $1 billion tracked higher moving up by 7.7% over the last twelve month period.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective all regions showed improvement on a price to tangible book basis during the second half of 2014 with the exception of the Southwest which saw a 6% decline from significant highs at mid-year as concerns over declining oil prices created uncertainty and the Mid-Atlantic region which remained relatively flat. The Midwest and West regions improved 6% followed by the Northeast improving 4% on a price to tangible book basis. Despite the Southwest’s declining price to tangible book, it remained the highest priced at 1.73x, followed by the West at 1.62x on strong economics, favorable earnings, net interest margins and equity levels. On a last twelve months (“LTM”) price to earnings basis, all regions reported higher prices during the second half of 2014 with the Southwest at 17.1x, followed by the West, Southeast and Northeast ranging from 16.2x to 16.5x earnings, with the Mid-Atlantic at 15.1x and the Midwest at 14.8x.
PRICING BY SIZE
Public bank pricing by size of institution remained relatively flat on a price to book basis for most banks with the exception of the largest banks those greater than $10 billion which saw a 5% decline in value and banks between $1 billion and $5 billion which showed a 4% increase in value during the second half of the year. On a price to LTM earnings basis, all institutions by size reported an uptick in pricing with return on assets remaining relatively flat. Banks between $1 billion and $10 billion reported the largest gains. Banks between $5 billion and $10 billion reported the highest pricing at a LTM price to earnings of 17.4x while banks greater than $10 billion reported 16.2x followed by banks between $1 billion and $5 billion at 15.8x. The smallest banks those below $1 billion reported LTM price to earnings between 13.3x and 14.0x.
The larger financial institutions typically reported the highest LTM ROAA levels and lowest NPAs/Assets while the smaller financial institutions, those below $1 billion, reported lower earnings and higher NPAs/Asset levels among banks by size.
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