Bank Stock Performance – February
Public bank stocks ended February up regaining most of the value that was given up during January 2014. Mixed trading during February was higher overall as the Federal Reserve hinted that interest rates may increase in 2015, consumer borrowing increased and positive employment trends continued in December. These positive economic trends outpaced the negative impact of the announcement of a lower amount of mortgage applications, a second downward revision to fourth quarter GDP, and a retreat in consumer spending in December 2014. Another key factor was the volatility in oil prices which influenced the broader markets and particularly influenced bank stocks in the Southwest region.
The SNL Bank Index improved 8% in February and outperformed the S&P 500’s growth of only 5.5%. The SNL Bank Index for banks between $1 billion and $5 billion in assets grew 4.4% while smaller banks, those between $500 million and $1 billion in assets, grew 2.6% and banks less than $500 million in assets remained relatively flat at 0.4% during February.
Over the last twelve months, ending February 2015, the SNL Bank Index grew 7.2% but lagged the S&P 500 which grew 13.2%. The smallest banks, those less than $1 billion in assets, gained the most in value as the SNL Index for banks less than $500 million in assets grew 9% while banks between $500 million and $1 billion in assets grew 5.2%. Banks between $1 billion and $5 billion in assets edged up slightly and grew 0.8% over the prior twelve month period.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Southwest and Western regions continue to maintain the highest price to tangible book exceeding 150% at February 27, 2015 with the Southwest, West and now the Northeast at a price to last twelve months (“LTM”) earnings approximating 16x. The most notable trend from a regional perspective is the continual and significant decline in bank stock pricing in the Southwest. As the region is heavily influenced by the energy sector, falling bank stock prices have mirrored the decline in the West Texas Intermediate oil price benchmark. The median pricing of Southwest banks dropped from nearly 200% of tangible book at March 31, 2014 to 157% at February 27, 2015. While the markets are bearish on the Southwest, tangible capital, earnings, asset quality and net interest margins remain high and are among the strongest of all regions. The Southeast region reported the most improvement in price to tangible book from 134% at March 31, 2014 improving to 142% at February 27, 2014 as performance, measured by return on average assets, gradually improved from 0.75% to 0.81% LTM at December 31, 2014. Similarly, the median tangible equity level in the Southeast improved from 9.27% at March 31, 2014 to 9.52% for the most recent quarter ending December 31, 2014. As the Mid-Atlantic, Midwest and Northeast regions dropped below 140% of tangible book at February 27, 2015, the Southeast exceeded 140% at year-end and remained above that level at month-end.
PRICING BY SIZE
Pricing continues to be proportional to size. The banks with assets greater than $5 billion remained at the highest pricing levels although they declined the most over the March 31, 2014 through February 27, 2015 period. The smallest banks with assets less than $1 billion consistently reported the lowest pricing on a tangible book and LTM earnings basis although they improved during February 2015. Banks below $500 million maintained pricing on a price to tangible book basis reporting 106%, but reported a 34% increase in price to LTM earnings from 9.4x at March 31, 2014 to 12.5x at December 31, 2014.
According to the FDIC, as of December 31, 2014, the overall fundamentals of the industry improved with annual net interest income increasing for the first time in four years. Approximately 64% of banks reported an improvement in earnings although overall net income declined for the first time in five years as a few of the largest banks reported higher litigation expenses, lower mortgage sales, lower securitization and lower servicing fees.
More information regarding nationwide M&A activity can be found here.Back to the Knowlege Center