Bank Stock Performance – March
Overall, public bank stocks ended March mixed while the broader market was slightly down. Generally positive reports concerning the economy, employment, mortgage applications and higher housing prices in March were offset by the Fed’s zero interest rate policy and the challenge of generating shareholder returns in 2015. Commentary following the Federal Reserve’s March meeting suggested that rates may not improve until September of this year. In conjunction with regulatory pressure to increase capital and liquidity, investors are eagerly awaiting first quarter earnings reports and remain concerned about the industry’s ability to generate higher returns this year.
The SNL Bank Index dipped 0.4% in March, less than the S&P 500’s decline of 1.7%. The SNL Bank Index for banks between $1 billion and $5 billion in assets grew 3.6% while smaller banks, those between $500 million and $1 billion in assets, grew 1% and banks less than $500 million in assets edged higher at 0.9% during March.
1ST QUARTER REVIEW
A review of the first quarter of 2015 shows greater market volatility with a pattern of setting new highs, correcting, and then again recording new highs. U.S. stocks were primarily buffeted by two substantial shocks, which continue into the second quarter as well. The first shock involved the energy sector and the abrupt and persistent decline in the price of oil. Certain oil grades and the related energy products are approximately 50% cheaper in the U.S. from a quarter ago. The decline in oil prices is a stimulant for the U.S. consumer with lower pries hopefully resulting in more consumer spending on products although painful for an energy industry which in transitioning from expansion to contraction.
The second shock came from the European Union, particularly the European Central Bank (the “ECB”). The ECB has embarked on a U.S. style quantitative easing program, approximately six years after the original U.S. quantitative easing was implemented. The central bank policy in the Eurozone is now based upon negative interest rates on the highest-grade sovereign debt. The ECB has said that it will acquire debt of Eurozone countries as part of its quantitative easing program and that it is willing to pay negative interest rates as long as the negative rate is no lower than 0.20%. This policy is unprecedented with regard to both its stated longevity (18 months) and its size (approximately $1 trillion U.S. dollars).
The SNL Bank Index decreased by 3.2% during the first quarter of 2015 but was up 1.9% over the past twelve month period. Smaller banks posted better returns during the first quarter, with the SNL Bank index for banks less than $500 million in assets increasing 2% which was down from the 5.9% increase over the prior twelve months. The SNL Bank $1 billion to $5 billion index posted a decrease of 0.7% during the quarter compared to the increase of 1.0% during prior twelve months. By comparison, the S&P 500 was up by approximately 0.4% during the first quarter of 2015 and was up by 10.4% over the past year.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Southwest and Western regions continue to maintain the highest price to tangible book with each exceeding 150% at March 31, 2015 and reported the highest tangible capital, return on average assets and net interest margins on a last twelve months (“LTM”) basis. While the highest, these regions reported a decline from levels approximating 160% of tangible book at year-end 2014. All other regions reported a price to tangible book between 139% and 144%. Both the Southwest and West reported consecutive quarter end declines in price to tangible book multiples with the Southwest, heavily influenced by the decline in oil prices impacted the most. The Southwest and West also reported the highest LTM earnings at just north of 16.5x with the Northeast and Southeast approximating 16x LTM earnings at 15.7x and 15.8x, respectively. All other regions reported an improvement in tangible book multiples during the fourth quarter of 2014 with the Mid-Atlantic, Midwest and Southeast continuing to report higher multiples at the end of March.
PRICING BY SIZE
Pricing, particularly on tangible book, continues to be proportional to size. The banks with assets greater than $5 billion remained at the highest pricing levels while the banks between $1 and $5 billion bridged the gap between the banks below $1 billion on the very low end of pricing. The largest financial institutions reported the highest return on average assets and best asset quality while the smallest institutions generally reported higher equity and higher net interest margins. 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 March 2015. Banks below $1 billion maintained pricing on a price to tangible book basis below 110% since March 2014. On a price to earnings basis, the largest institutions greater than $1 billion maintained pricing multiples between approximately 15.5x and 16x, while the smaller institutions maintained pricing multiples between approximately 12x and 14x.
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