April was a month of volatility which saw the S&P 500 and the SNL Bank Index book small gains. Bank stock prices as a whole increased 0.2% in the month while the S&P 500 increased 0.3%. Bank stocks and the broader market volatility in April traded around trade talk with China, the beginning of first quarter earnings season, and interest rate movement.
Bank stocks and the overall market fell early in the month on an announcement from China that it would impose tariffs on some U.S. products in retaliation of the steel and aluminum tariffs placed by President Donald Trump. Fears of a trade war with China continued early in the month as the Office of the U.S. Trade Representative released a list of Chinese imports that it would like to add an additional 25% tariff to following the tariff announcement from the Chinese. The Chinese retaliated by levying its own tariffs on agricultural products from the U.S., but markets rebounded midmonth as trade tensions began to lessen and on word from U.S. officials that there may be interest in denuclearization from North Korea. Banks earnings season kicked off midmonth in which many banks showed signs of benefiting from higher interest rates and U.S. tax changes. The minutes from the March Federal Open Markets Committee (“FOMC”) meeting were released showing that some officials think interest rates may have to be hiked more quickly going forward on continued economic growth and firming in inflation. The banking sector slid again later in the month as the 10-year Treasury surpassed 3% for the first time in four years due to continued economic growth, rising commodity prices, and the tightening of monetary policy. The FOMC begins meetings on May 1, as it is expected they will keep the federal funds target rate at 1.50% to 1.75% as Fed officials have penciled in at least two more rate hikes in 2018.
In other related news, the Federal Reserve Bank of New York selected its new president in San Francisco Federal Reserve President, John Williams, who will take over in June. Also during April, President Donald Trump said he will nominate Richard Clarida and Michelle Bowman to the Federal Reserve Board of Governors. Clarida is expected to be nominated as Vice Chairman for a term ending in 2022, and Bowman nominated to a seat reserved for a community banker with a term ending in 2020. Banking regulatory reform received a boost as House Financial Service Committee Chairman said he would be OK with his chamber passing the Senate’s Dodd-Frank revision bill. Thomas Hoenig also announced that he will resign as vice chairman and a board member of the Federal Deposit Insurance Corp., effective April 30.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 103,000 in March, falling short of consensus estimates of 175,000. The unemployment rate, meanwhile, remained 4.1%. In March, U.S. existing-home sales rose from the prior month, but came in 1.2% below the levels from a year-ago, according to the National Association of Realtors. The median existing-home price for all housing types was $250,400, up 5.8% from the prior year. The U.S. economy grew faster than expected in the first quarter, as GDP growth was 2.3% in the quarter, down from 2.9% in the fourth quarter of 2017, but beat consensus expectations of 2.0%.
Bank M&A pricing was up significantly in April 2018 compared to April 2017 on a higher number of transactions (see chart below).
The SNL Bank Index had a volatile month but ended relatively flat, up 0.2% in April and was in line with the S&P 500 which gained 0.3% during the month. While the SNL Bank Index was fairly flat in the month, banks below $500 million decreased 0.3%, banks between $500 million and $1 billion increased 0.8%, and banks between $1 billion and $5 billion increased the most at 1.1% during the month.
Over the three month period ending April 2018, the SNL Bank Index decreased 7.9% while the S&P 500 decreased 6.2%. Over the prior twelve months, the SNL Bank Index slightly outperformed the overall market, as it increased 14.8% while the S&P 500 increased 11.1%, and banks less than $500 million increased the most by 17.2%.
REGIONAL PRICING HIGHLIGHTS
Since March, pricing in the Midwest region reported the largest increase in price to tangible book multiples of 4.3% to be the fourth highest priced region at a price to tangible book multiple of 193.7%. The Southwest region remained the highest priced region (price to tangible book multiple of 218.4%) followed by the Southeast and Northeast regions (197.4% and 195.5%) as the three were up 0.5%, 0.3% and 0.5%, respectively. The Mid-Atlantic remained the lowest priced region and saw the largest decrease in pricing in the month of 3.1% to 175.4% price to tangible book.
Pricing remained strong among the Southwestern public banks supported by strong earnings (ROAA 1.00%), the second strongest Net Interest Margin (3.68%) and good asset quality (NPAs/Assets of 0.65%). The Southeast remained the second highest priced region, supported by a Net Interest Margin of 3.61%, improving asset quality (NPAs/Assets 0.75%), but the weakest loan demand by region (Loans/Deposits 88.5%). Loan demand improved in the Northeast region (Loan/Deposits of 95.3%), but the Net Interest Margin in the Northeast remained the weakest among the regions at 3.25% and ROAA remained seconded lowest at 0.86%. The Midwest region was the most profitable region with an ROAA of 1.02% and the third strongest Net Interest Margin of 3.66%. The West was tied as the second most profitable region with the Southwest region (ROAA of 1.00%) while the Net Interest Margin remained the highest (3.82%), had the best asset quality (NPAs/Assets of 0.51%), but had the second weakest loan demand with a Loans to Deposits ratio of 89.1%. The Mid-Atlantic remained the lowest priced region on the weakest earnings (ROAA 0.77%), the second weakest Net Interest Margin (3.49%), the weakest asset quality (NPAs/Assets of 0.76%), but reported the strongest loan demand with Loans/Deposits of 97.4%.
On a median price to earnings basis, all regions decreased pricing in April as compared to in the month of March. The West region decreased the most at 9.5% to become the fourth highest priced region at 19.0x. The Southwest and the Southeast region were tied as the highest priced regions on price to earnings after decreasing 5.7% and 4.5%, respectively, in the month to 21.9x. The Mid-Atlantic saw the smallest decrease in pricing in April of 3.6% to remain the lowest priced region on a price to earnings multiple of 18.3x, and the Northeast region saw the second largest decrease in pricing of 6.7% to a median price to earnings multiple of 18.9x. The lowest priced region remained the Midwest at 18.3x after a 3.6% decrease in April.
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 April, that differential was approximately 51% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During April, the pricing for the three groups with total assets over $1 billion slightly increased their median tangible book 2.1% with a price to tangible book average of 213.4%. The highest priced asset class remained the group with assets between $5 billion and $10 billion with a small pricing increase of 0.2% in April, at 231.3% price to tangible book. The group with assets less than $500 million saw the largest decrease in pricing in April of 4.5% to 142.2% price to tangible book. The groups with assets from $1 billion to $5 billion saw the second largest increases in pricing of 1.5% in the month to 184.9%. The group with assets greater than $10 billion saw the largest increase in pricing in the month of 4.1% to 223.2% price to tangible book. On a price to LTM earnings basis, the smallest banks (less than $500 million) was the only asset class to increase in April and saw a large increase in pricing, to a price to earnings multiple of 30.6x. The group with assets between $1 billion and $5 billion saw the largest pricing decrease of 6.4% to a price to earnings multiple of 20.0x. The groups with assets between $500 million and $1 billion and the group with assets between $5 billion and $10 billion both saw a decrease in pricing of 3.1% and 3.5% to a price to earnings of 20.4x and 20.2x, respectively. Lastly the group with assets greater than $10 billion saw a decrease in price to earnings of 2.0% to remain the lowest priced group at 18.9x.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.41%) but higher loan demand (average Loans/Deposits of 95.1%) than institutions with assets over $1 billion (average median LTM ROAA 1.00% and Loans/Deposits 92.1%).
Mergers & Acquisitions by Region
Bank consolidation ticked up in April to be slightly up in 2018 as compared to April 2017 with 75 transactions announced through April 2018, but only 38 transactions with terms, compared to 71 through April 2017, but 46 transactions with terms. Median pricing in 2018 was substantially higher on a price to tangible book increase of 19.5% (median 1.92x), on a price to 8% tangible book increase of 25.0% (2.07x), on an increase of price to deposits of 6.0% (22.6%), and higher on a price to earnings basis with an 11.8% increase on LTM earnings (25.2x).
The South region had the highest number of transactions and number of transactions with terms, was the highest priced on an 8% tangible book basis with a multiple of 2.35x, and second highest on a price to deposits basis of 24.1%. The West region had eight transactions with pricing, and was the highest priced region on a tangible book basis of 2.11x, highest on a price to deposits basis of 24.6%, and second highest on price to 8% tangible book with a multiple of 2.30x. The deals in the West region were the most profitable with an LTM ROAA and ROAE of 0.76% and 7.39%, and had the second best asset quality (NPAs/Assets 0.47%). The Southwest continued with strong pricing as the second highest priced on a price to tangible book basis of 2.05x and the third strongest price to 8% tangible book of 2.16x. The East – New England region was the highest priced on a LTM earnings basis with a 38.4x multiple (although there were only three transactions that reported pricing in the region), but it was the least profitable (LTM ROAA 0.22%). The Midwest generally remained generally one of the lowest priced regions, although it was not near the bottom in asset quality or profitability, with nine transactions with pricing for a price to tangible book multiple of 1.64x, a price to 8% tangible book of 1.81x and price to LTM earnings of 27.7X. The North Central region has 18 transactions, but only three with pricing. The region was the lowest priced on every multiple with a price to book of 1.43x, price to 8% tangible book of 1.42x and price to LTM earnings of 17.4x, although the region was the second most profitable with an ROAA of 0.69% and had the best asset quality (NPAs/Assets 0.38%).
More information regarding nationwide M&A activity can be found here.