Public Bank Stock Performance – August 2018
In the month of August the SNL Bank Index lagged the S&P 500 with the SNL Bank Index increasing 0.9% and the S&P 500 increasing 3.0%. Bank stocks and the broader market traded around Fed rate decisions, continued tariff tensions, and strong corporate earnings.
The month began with the Federal Reserve holding rates steady for August noting the strong state of U.S. economic activity. Accordingly, both the S&P 500 and bank stocks rose during the early part of the month. The market trended downward mid-month as U.S. tariffs continue to loom. Threats between China and the U.S. emerged again with the Trump administration reiterating its intent to move forward with Chinese tariffs. This compelled a not-surprising retaliation from China implying tariffs against many U.S. goods. Bank stocks were more directly affected by Trump’s indication of more tariffs to be imposed on Turkey, deepening Turkey’s economic struggles and decreasing investor confidence. During the latter of the month, strong corporate earnings, positive trade discussions between the U.S. and both Canada and Mexico, and a report of 4.2% increase in GDP during the second quarter helped the market recover to end the month in the positive.
In other related news, the Federal Reserve is expanding the threshold for its small bank holding company policy provision from $1 billion to $3 billion, allowing more banks the possibility to finance acquisitions through debt. Also, in another regulatory easing effort, the OCC has decided to take applications for financial technology companies to obtain a national bank charter.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 201,000 in August, beating the consensus estimates of 191,000. The unemployment rate remained unchanged at 3.9% while the average hourly earnings for employees rose by ten cents, or 0.37% month over month. In July, U.S. existing-home sales declined for a fourth straight month. Sales are 1.5% below the levels from a year-ago, according to the National Association of Realtors. The median existing-home price for all housing types was $269,600, up 4.5% from the prior year.
Bank M&A pricing was up significantly in August 2018 compared to August 2017 on a slightly higher number of transactions (see chart below).
The SNL Bank Index climbed in the beginning of August, but couldn’t keep the pace the remainder of the month and ended the month up only 0.9% while underperforming the S&P 500 which gained 3.0% during the month. While the SNL Bank Index was up in the month, banks below $500 million decreased 0.6%, with banks between $500 million and $1 billion increasing 0.4%, and banks between $1 billion and $5 billion increasing 0.3%.
Over the three month period ending August 2018, the SNL Bank Index increased 4.4% while the S&P 500 increased 7.3%. Over the prior twelve months, the SNL Bank Index increased 18.4% and the S&P 500 increased 17.4%. Banks between $500 million and $1 billion increased the most by 21.2%, followed by banks with between $1 billion and $5 billion which increased 17.3%, and banks with less than $500 million increased by 17.1%.
REGIONAL PRICING HIGHLIGHTS
In August, regional pricing was mixed with half of the regions seeing a decrease in pricing while the other half saw an increase. The Northeast experienced the largest increase in August of 3.1%, and became the second highest priced region on a price to tangible book multiple of 206.6%. The Southwest remained the highest priced region at a 219.9% price to tangible book with a 0.2% increase. The Southeast and Mid-Atlantic regions decreased 0.9% and 1.3% respectively in August to multiples of 201.5% and 172.2%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest region also logged a slight increase in pricing of 0.4% in the month to a price to tangible book of 199.0%, and remained the third lowest price region. The West experienced the largest price decrease in August of 3.6%, and remained the second lowest price region at a price to tangible book multiple of 190.4%.
Pricing remained strong among public banks in the Southwest supported by strong earnings (ROAA of 1.05%), the second strongest Net Interest Margin (3.68%) and good asset quality (NPAs/Assets of 0.59%). The Southeast dropped to the third highest priced region, and had the second weakest loan demand (Loan/Deposits of 91.1%), had the second highest asset quality (NPAs/Assets of 0.59%) and was middle of the road on profitability (ROAA of 0.95%) and NIM (3.67%). The Northeast region’s asset quality took a hit to the lower half of the group (NPAs/Assets 0.64%), but kept a strong loan demand (Loan/Deposits of 98.1%). The Midwest region was the third lowest priced region although profitability remained the best of any region with an ROAA of 1.09% and a Net Interest Margin of 3.67%. The West was the third most profitable region with an ROAA of 1.04% and had the best Net Interest Margin of 3.84%, had the best asset quality (NPAs/Assets 0.45%), but was the second lowest priced region on weak loan demand with Loans/Deposits of 89.1%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.85%, had the second worst asset quality (NPAs/Assets 0.66%), but had strong loan demand with Loans/Deposits of 97.1%.
On a median price to earnings basis, pricing was also mixed. The Northeast region again saw the largest decrease in pricing of 3.7% to drop to the third lowest priced region with a price to earnings multiple of 19.0x. The Southeast region remained the second highest priced with a price to earnings multiple of 20.4x after a 0.4% increase in August. The Southwest region saw a price increase of 2.9% in August to a price to earnings multiple of 21.5x, remaining the highest priced of the regions. The Mid-Atlantic was the third highest priced region after staying flat in August keeping a price to earnings multiple of 19.4x. The largest price increase came in the West with 3.1%, moving it up to the third lowest priced region, while the Midwest experienced a decrease of 1.4% to a 17.5x price to earnings multiple making it the lowest of the regions.
PRICING BY SIZE
Size continues to impact bank stock prices. Financial institutions with total assets greater than $1 billion consistently report pricing approximately 50% higher median price to tangible book pricing than their peers with total assets less than $1 billion. In the month of August, that differential was in line at an approximately 50% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During August, pricing for the three groups with total assets over $1 billion slightly decreased by 0.6% on a median price to tangible book basis with a price to tangible book median of 222.0%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, with the group experiencing an increase in pricing of 2.0% in August to a 232.0% price to tangible book. The group with assets greater than $10 billion saw a decrease in pricing in August of 0.6% to a median price to tangible book of 222.0%, but remained the second highest priced group. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 1.3% in August to price to tangible book multiples of 182.6%. The group with assets from $500 million to $1 billion and the group with less than $500 million (which constitutes only five companies) experienced considerable increases in pricing of 5% and 18.5% to a price to tangible book multiple of 149.7% and 146.2 in August, respectively. On a price to LTM earnings basis, the largest bank group (over $10 billion) was the only group to see an increase in pricing (3.9%). The group with assets between $500 million and $1 billion experienced a decrease in its price to earnings multiple of 0.7% to 20.8x and is the highest priced group. The group with assets between $1 billion and $5 billion stayed virtually flat (-0.3%) in the median price to earnings multiple in August keeping the same multiple of 19.9x. The two groups with assets between $5 billion and $10 billion and assets greater than $10 billion saw increases in pricing of 0.7% and 3.9% to price to earnings multiples of 19.7x and 18.0x, respectively, but still remain the two lowest priced groups on a price to earnings basis.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.80%) but a slightly higher loan demand (average Loans/Deposits of 93.2%) than institutions with assets over $1 billion (average median LTM ROAA 1.06% and Loans/Deposits 92.4%).
Mergers & Acquisitions by Region
Bank consolidation has been up through August 2018 as compared to August 2017 with 176 transactions announced through August 2018 (92 transactions with terms), compared to 160 through August 2017 (100 transactions with terms). August 2018 was another busy month on the Mergers and Acquisitions front with 16 deals announced. Median pricing in 2018 was substantially higher than 2017 on a price to tangible book increase of 5.8% (median 1.74x), on a price to 8% tangible book increase of 8.8% (1.90x), on an increase of price to deposits of 8.6% (22.2%), and higher on a price to earnings basis with a 15.7% increase on LTM earnings (25.0x).
The South region continues to have the highest number of transactions and number of transactions with terms with 41 deals through August of which 25 reported terms. Transactions in the South reported the second highest price to tangible book with a multiple of 176%, the second highest price to 8% tangible book (198%), the second highest price to earnings (26.2x) and the second highest price to deposits wat 23.7%. The West region has reported 18 deals in 2018 with 15 of them reporting terms, and reported the highest pricing on a price to tangible book basis, price to 8% tangible book, and price to deposits (210%, 227%, and 23.7%, respectively). The high pricing in the West is supported by the strongest asset quality deals (NPAs/Assets of 0.52%), the highest level of profitability (ROAA 0.82%) and the largest median total assets. The Midwest and North Central regions each had over 30 transactions in 2018 with the Midwest having 40 (20 with terms), and the North Central having 32 (only six with terms). Both regions remained the two lowest priced on a price to tangible book (Midwest at 164% and North Central at 162%). The North Central region was the lowest priced region across all multiples except for price to earnings (20.6x) finishing second lowest. Although it was the second most profitable and had the second best asset quality, it was the smallest median total assets. The East – New England and the Southwest each eclipsed 20 deals through July (22 and 23). The Southwest remained the third lowest priced on a price to tangible book basis of 1.71% and mid-level on a price to 8% tangible book basis of 1.89%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.6x multiple with 16 transactions with pricing, but it was one of the least profitable regions (LTM ROAA 0.50%).
More information regarding nationwide M&A activity can be found here.Back to the Knowlege Center