March was another volatile month with the S&P 500 and the SNL Bank Index taking a large dip in the back half of the month. Bank stock prices as a whole decreased 5.4% in the month while the S&P 500 decreased 2.7%. Bank stocks and the broader market volatility in March were driven by fears of a trade war with China, action by the Federal Reserve, and by political developments out of Washington D.C.
Bank stocks and the overall market slid early in the month on news of President Donald Trump’s support of global steel and aluminum tariffs, and on Federal Reserve Chairman Jerome Powell’s comments about the strength of the economy as observers began to consider the possibility of four hikes to the Federal Funds target rate in 2018. On March 8th President Trump signed the proposed 25% tariff on U.S. global steel imports and a 10% tariff on global aluminum imports, to go into effect March 23rd, with Canada and Mexico having the opportunity to rework NAFTA. Financial sector stocks took another tumble mid-month, after fears of a trade war had eased, on new inflation data that showed a mild increase in prices. Along with volatility around potential of a trade war and anticipation of the Federal Open Market Committee (“FOMC”) meeting in which a hike to the Federal Funds target rate was expected, President Trump announced that he was replacing Rex Tillerson as Secretary of State with CIA Director Mike Pompeo. On the 21st the FOMC announced the first rate hike of 2018 and Chairman Jerome Powell said he expects further rate hikes will be necessary this year. Projections show at least two additional rate hikes in 2018, although many experts believe there could be even three. Markets took a tumble again the following day on news that President Trump would impose $50 billion in tariffs on U.S. imports from China to offset the gains the Chinese have received through unfair practices. To close the week filled with action out of D.C. President Trump signed an omnibus bill that would keep the government running for another six months. The SNL Bank Index and S&P 500 ticked up slightly to end the month down 5.4% and 2.7% on investors taking advantage of the selloff the previous week.
During the month a bipartisan bill aimed at easing the regulatory process for smaller banks moved forward with the Senate voting 67-32 to being debate on the measure. Bank and thrifts saw some positive signs in regulation relief when the U.S. Senate passed legislation rolling back portions of the Dodd-Frank post crisis financial regulatory framework.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 313,000 in February, beating consensus estimates of 200,000. The unemployment rate, meanwhile, remained 4.1%. In February, U.S. pending home sales rose 3.1% from the prior month, according to the National Association of Realtors. Average hourly earnings increased by $0.04 in the month to $26.75, up $0.68 or 2.6% year-over-year. The Labor Department reported that inflation rose 2.2% year-over-year in the month, coming in around analysts’ estimates, and increasing slightly since 2.1% in January.
Bank M&A pricing was up significantly in March 2018 compared to March 2017 on a fewer number of transactions (see chart below).
The SNL Bank Index decreased 5.4% in March and was outperformed by the S&P 500 which lost 2.7% during the month. While the SNL Bank Index decreased in the month, banks below $500 million increased 3.3%, banks between $500 million and $1 billion increased 1.4%, and banks between $1 billion and $5 billion increased the most at 3.4% during the month.
Over the three month period ending March 2018, the SNL Bank Index decreased 1.8% while the S&P 500 decreased 1.2%. Over the prior twelve months, the SNL Bank Index slightly underperformed the overall market, as it increased 9.0% while the S&P 500 increased 11.7%, and banks between $500 million and $1 billion increased the most by 18.9%.
REGIONAL PRICING HIGHLIGHTS
Every region except for the Southwest reported higher price to tangible book multiples in the month of March while the Southwest region median price to tangible book saw a 0.6% decrease in the month, but remained the highest priced region at 217.2%. The Mid-Atlantic remained the lowest priced region although it saw the largest increase in pricing in the month of 7.9% to 181.0% price to tangible book. The Southeast region remained the second highest priced region at 196.9% price to tangible book after seeing the second largest increase in pricing in the month of 3.6%. The West, Northeast, and Midwest regions all saw modest growth of 3.5%, 3.1%, and 2.0% in March to price to tangible book multiples of 191.6%, 194.5%, and 185.6% respectively.
Pricing remained strong among the Southwestern public banks supported by strong earnings (ROAA 0.96%), Net Interest Margin (3.62%) and improved asset quality (NPAs/Assets of 0.64%). The Southeast remained the second highest priced region, supported by a Net Interest Margin of 3.64% although it had the worst asset quality (NPAs/Assets 0.78%). Loan demand remained strong in the Northeast region (Loan/Deposits of 94.7%), second only to the Mid-Atlantic region (Loan/Deposits of 96.9%) but the Net Interest Margin in the Northeast remained the weakest among the regions at 3.27% and ROAA remained seconded lowest at 0.80%. The Midwest region was the most profitable region with an ROAA of 0.98% and the second strongest Net Interest Margin of 3.65%. The West was the second most profitable region (ROAA of 0.97%), Net Interest Margin remained the highest (3.79%), and had the best asset quality (NPAs/Assets of 0.50%). The Mid-Atlantic remained the lowest priced region on the weakest earnings (ROAA 0.77%) and the second weakest Net Interest Margin (3.47%) behind the Northeast but reported the strongest loan demand with Loans/Deposits of 96.9%.
On a median price to earnings basis, all regions increased pricing in March with the West region increasing the most, but remaining the third highest priced region at 21.0x. The Southwest region remained the highest priced region on price to earnings after a 2.4% increase in the month at 23.2x closely trailed by the Southeast region which increased 1.9% in March and now has a median price to tangible book of 23.0x. The Mid-Atlantic saw the second largest increase in pricing on a price to earnings multiple basis in March of 4.3% to 20.9x, and the Northeast region saw the smallest increase in pricing of 1.1% to a median price to earnings multiple of 20.2x. The lowest priced region remained the Midwest after a 2.3% increase to median price to earnings to 19.0x.
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 March, that differential was approximately 44% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During March, the pricing for the three groups with total assets over $1 billion slightly increased their median tangible book pricing averaging 209.1%. The highest priced asset class remained the group with assets between $5 billion and $10 billion with a pricing increase of 2.8% in March, at 231% price to tangible book. The group with assets less than $500 million saw the largest increase in pricing in March of 4.5% to 149% price to tangible book. The groups with assets from $1 billion to $5 billion saw a modest increases in pricing of 3.5% in the month to 182.1%. The group with assets greater than $10 billion saw the largest decrease in pricing in the month of 1.7% to 214.5% price to tangible book. On a price to LTM earnings basis, the smallest banks (less than $500 million) saw the largest increase in pricing, followed closely by the group with assets between $1 billion and $5 billion which saw pricing increase 5.8% and 5.1% to 20.7x and 21.4x, respectively. The group with assets between $500 million and $1 billion saw a slight decrease in pricing on a price to earnings basis of 0.5% in the month of March to 21.1x and the group with assets greater than $10 billion saw the biggest decrease in price to earnings of 2.5% to become the lowest priced group at 19.3x. The group with assets between $5 billion and $10 billion saw a small uptick in price to earnings of 0.5% to 20.9x.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.44%) but higher loan demand (average Loans/Deposits of 93.7%) than institutions with assets over $1 billion (average median LTM ROAA 0.94% and Loans/Deposits 92.4%).
Mergers & Acquisitions by Region
Bank consolidation in 2018 continued at a slightly slower pace as compared to March 2017 with 51 transactions announced through March 2018 compared to 55 through March 2017. However, median pricing in 2018 was substantially higher on a price to tangible book increase of 20.2% (median 1.93x), on a price to 8% tangible book increase of 29.2% (2.11x), on an increase of price to deposits of 13.5% (24.6%), and higher on a price to earnings basis with a 20.5% increase on LTM earnings (25.7x).
The South region was the highest priced on an 8% tangible book basis with a multiple of 2.39x, and on a price to deposits basis of 25.2%. The West region was the highest priced region on a tangible book basis of 2.10x and the East – New England was the highest priced on a LTM earnings basis with a 38.4x multiple (although there were only two transactions that reported pricing in the region). The West had the most transactions with pricing (7) and was the highest priced region on a tangible book basis of 2.10x and was the second highest priced with an 8% tangible book multiple and an LTM earnings multiple 2.27x and 25.0%. The deals in the West region were the most profitable with an LTM ROAA of 0.81% and had the best asset quality (NPAs/Assets 0.30%). The East – New England only had two transaction with terms as the third lowest priced region on a tangible book multiple as it was the second least profitable (LTM ROAA 0.39%) and the Southwest was the third highest priced region on an 8% tangible book multiple of 2.00x and a price to tangible book multiple of 1.88x with two transactions with pricing. The Midwest generally remained the lowest priced region, although it was not near the bottom in asset quality or profitability, with six transactions with pricing for a price to tangible book multiple of 1.43x, a price to 8% tangible book of 1.80x and price to LTM earnings of 20.2X. The North Central region has 13 transactions, but none with pricing.
More information regarding nationwide M&A activity can be found here.