In the month of February the SNL Bank Index mirrored the S&P 500, with both indexes increasing 3.0%. Bank stocks and the broader market traded around a different Fed measure, optimism on a trade agreement with China, and positive fourth quarter results.
Indexes rose throughout most of the month, with bank stocks tracking with the S&P 500. Through the beginning and mid-month, news from the China trade agreement comes with optimism of a deal getting done by this summer. Also, the Fed stated it might start reducing its holdings of Treasury bonds by as early as the end of this year, which should lower borrowing costs. The U.S. reportedly ended the year with a better than expected 2.6% GDP growth over the last three months. Lastly, with fourth quarter earnings season mostly concluded, 71% of US companies reported better than expected earnings. All of these factors contributed to a generally positive month in the overall market.
In other related news, Fed Chairman Jerome Powell gave his semiannual monetary policy update this month, where he fielded many questions specific to banks as well as the overall economy. On CECL compliance, Powell stated that he is aware of concerns about the pending rule change, but that he does not believe it will lead to a hindrance of banks’ abilities to lend during times of recession. On monetary policy, Powell stated that they are in “no rush” to make future interest rate changes.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 20,000 in February, well below the consensus estimates of 180,000. The unemployment rate declined to 3.8% while the average hourly earnings for employees increased by eleven cents, or 0.4% month over month. In January, U.S. existing-home sales fell 1.2% from December. Sales are 8.5% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $247,500, up 2.8% from the prior year.
Bank M&A pricing was slightly down in February 2019 compared to February 2018 on the same number of transactions (see chart below).
The SNL Bank Index showed an overall increase through the month increasing 3.0%, mirroring the S&P 500, also up 3.0% during the month. The SNL Bank Index was up in all size groups as banks between $1 billion and $5 billion increased 6.1%, banks between $500 million and $1 billion increased 2.9%, and banks below $500 million gained 4.3%.
Over the three month period ending February 2019, the SNL Bank Index decreased 2.2% while the S&P 500 slightly increased with a small gain of 0.9%. Over the prior twelve months, the SNL Bank Index decreased 10.4% while the S&P 500 increased 2.6%. Banks between $500 million and $1 billion decreased by 0.2%, while banks with assets less than $500 million decreased 3.3%, and banks between $1 billion and $5 billion decreased 1.6%.
REGIONAL PRICING HIGHLIGHTS
In February, pricing was up across all regions. The Southwest experienced the largest increase in February of 17.7%, and became the highest priced region on a price to tangible book multiple of 185.2%. The West fell to the second highest priced region at a 173.5% price to tangible book after having increased 9.6% in the month. The Southeast and Mid-Atlantic regions increased 17.4% and 12.9% in February to multiples of 161.6% and 151.7%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest and Northeast each increased 13.8% and 8.3%, respectively, in the month to a price to tangible book of 166.8% and 163.5%, respectively. The Northeast became the third lowest priced region, and the Midwest region sits at the third highest priced region.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.28%), Net Interest Margin (3.78%), and asset quality (NPAs/Assets of 0.50%). The Southeast was the second lowest priced region, and had the second weakest loan demand (Loan/Deposits of 91.2%), the weakest asset quality (NPAs/Assets of 0.75%) and middle of the road on profitability (ROAA of 1.21%) and NIM (3.67%). The Northeast region’s asset quality has improved (NPAs/Assets 0.55%) and the region kept the highest loan demand (Loan/Deposits of 97.5%). The Midwest region fell to third strongest profitability with an ROAA of 1.23% and a third highest Net Interest Margin of 3.72%. The West rose to the second most profitable region with an ROAA of 1.27% and had the best Net Interest Margin of 3.95%, the strongest asset quality (NPAs/Assets 0.36%), and improving loan demand with Loans/Deposits of 91.6%. The lowest priced region, the Mid-Atlantic, had the second lowest profitability with an ROAA of 1.09%, the third weakest asset quality (NPAs/Assets 0.56%), but strong loan demand with Loans/Deposits of 96.5%.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.28%), Net Interest Margin (3.75%), and asset quality (NPAs/Assets of 0.47%). The Southeast was the second lowest priced region, and had the second weakest loan demand (Loan/Deposits of 91.2%), the second weakest asset quality (NPAs/Assets of 0.62%) and middle of the road on profitability (ROAA of 1.22%) and NIM (3.68%). The Northeast region’s asset quality has improved (NPAs/Assets 0.62%) and the region kept the highest loan demand (Loan/Deposits of 96.3%). The Midwest region remained at the third strongest profitability with an ROAA of 1.23% and a third highest Net Interest Margin of 3.72%. The West rose to the second most profitable region with an ROAA of 1.27% and had the best Net Interest Margin of 3.95%, the strongest asset quality (NPAs/Assets 0.37%), and improving loan demand with Loans/Deposits of 91.6%. The lowest priced region, the Mid-Atlantic, had the second lowest profitability with an ROAA of 1.09%, the third weakest asset quality (NPAs/Assets 0.56%), but strong loan demand with Loans/Deposits of 96.3%.
On a median price to earnings basis, pricing increased across each of the regions. The Northeast region increased 13.1%, and is now the third lowest priced region with a price to earnings multiple of 13.5x. The Southeast region rose to the second highest priced region with a price to earnings multiple of 13.8x with an increase of 15.7% in February. The Southwest region saw a price increase of 11.7% in February to a price to earnings multiple of 15.0x, maintaining its position as the highest priced of the regions. The Mid-Atlantic increased the third most at 14.5% in February with a price to earnings multiple of 13.3x (second lowest in the group). The West increased 9.3%, with a 13.2x price to earnings multiple, while the Midwest experienced an increase of 12.9% to a 13.6x price to earnings multiple, improving to the third highest 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 February, that differential was 54.6% higher for the peers with assets greater than $1 billion on a price to tangible book basis. During February, pricing for the three groups with total assets over $1 billion increased by 19.4% on a median price to tangible book basis to a price to tangible book median of 194.0%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experienced an increase in pricing of 18.8% to a 198.1% price to tangible book multiple. The group with assets from $1 billion to $5 billion saw an increase in pricing of 10.6% to a price to tangible book multiple of 152.3%. The group with assets from $500 million to $1 billion and the group with less than $500 million (which constitutes only five companies) ended the month with price to tangible book multiples of 131.2% and 119.7%, respectively, with pricing for the $500 million to $1 billion group increasing 6.9% while the group less than $500 million increased 19.5%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw the largest increase in pricing of 17.7%. The group with assets between $500 million and $1 billion saw the only decrease in its price to earnings multiple, down 1.1% to 14.4x yet is still the second highest priced group. The two groups with assets between $1 billion and $5 billion and between $5 billion and $10 billion saw increases in pricing of 11.9% and 14.1% to price to earnings multiples of 13.7x and 13.8x, respectively. The highest priced was the group with less than $500 million, increasing 5.8% to a 16.5x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.77%) and loan demand (average Loans/Deposits of 92.6%) than institutions with assets over $1 billion (average of median LTM ROAA 1.23% and Loans/Deposits 93.0%).
Mergers & Acquisitions by Region
Bank consolidation was flat through February 2019 as compared to February 2018 with 34 transactions announced through February 2019 (15 transactions with terms). Transactions with terms through February 2018 was also 15. Median pricing through 2019 was lower than 2018 on a price to tangible book decrease of 17.7% (median 1.60x), a price to 8% tangible book decrease of 21.7% (1.62x), a decrease of price to deposits of 22.1% (17.6%), and a price to earnings basis with a 30.1% decrease on LTM earnings (16.8x).
The South region continues to have the highest number of transactions and number of transactions with terms with 11 deals through February of which 6 reported terms. Transactions in the South reported the second lowest price to tangible book of the group with a multiple of 152%, the second lowest price to 8% tangible book (158%), and lowest price to earnings (14.2x) but the third highest price to deposits at 17.9%. The West region has reported 3 deals in 2019 with 2 of them reporting terms, and reported the second highest pricing on a price to tangible book basis, highest price to 8% tangible book, and highest price to deposits (173%, 209%, and 24.1%, respectively). The Midwest and North Central had 8 and 4 transactions, respectively, to begin 2019 (3 and 2 with terms, respectively), with a 158% and 174% price to tangible book, respectively. The East – New England region logged 5 transactions (2 with terms) with a price to tangible book of 145% and the highest price to deposits of 18.4%. The Southwest had 3 deals through February, but none with deal terms.
More information regarding nationwide M&A activity can be found here.