Public bank stocks fell sharper than the broader market as lower oil prices and concerns over Greece and China weighed heavily on investors mind, despite the positive unemployment report in early August that exceeded expectations. With concerns over China devaluing its currency and oil prices hitting 6-year lows, investors are questioning the Federal Reserve’s possible September rate hike. Further, the FOMC minutes did nothing to relieve market concerns over China. However, some believe the sell-off has been a “knee-jerk” reaction. In either case, the concerns over falling oil and global stability sent broader markets and public bank and thrift stocks lower during August. M&A pricing was up year-to-date through August compared to year-to-date pricing through August 2014 although the number of M&A transactions was the same.
The SNL Bank Index dropped 7.1% in August underperforming the S&P 500 which fell 6.3%. The SNL Bank Index for banks between $500 million and $1 billion in assets had the best showing in the month with a 0.8% decrease after climbing 3.3% in July, followed closely by banks under $500 million which lost 0.9% after dropping 0.4% in July. Banks between $1 billion and $5 billion dropped 2.5% after remaining flat in July.
Over the past three months, the SNL Bank index decreases of 3.0% outpaced the broader market with the S&P 500 index decreasing 6.4%. Banks with assets between $1 billion and $5 billion reported the highest growth at 3.3% while banks with assets between $500 million and $1 billion grew 2.2%, followed by banks under $500 million which edged up 0.3%.
Over the past 12 months, banks continued to outperform the broader markets with the SNL Bank Index improving 3.9% compared to the S&P 500 which lost 1.6%. Banks between $1 billion and $5 billion gained the most again at 9.6%, while the smallest banks, those under $500 million, grew 9.0%. Also outperforming the market were banks between $500 million and $1 billion, which improved 7.0%.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Western and Southwest regions continue to maintain the highest price to tangible book multiples. The West reported a median price to tangible book multiple of 161%, up 2% from 158% at June 30, 2015, while the Southwest reported 157% of tangible book, down 4% from 163% at June 30, 2015 as oil prices dropped. Both regions reported the highest levels of tangible equity, LTM earnings and net interest margins as of June 30, 2015. As the economy improves and asset quality problems abate, the Southeast was the only region to see a consistent improvement in tangible multiples over the review period and LTM earnings multiples during 2015.
On a median price to earnings basis, pricing ranged from 14.2x to 16.4x LTM earnings with the Southeast, Southwest, and West at the high end averaging 16.1x while the Mid-Atlantic, Midwest, and Northeast approximated 15x earnings. The Southwest and West each reported the highest LTM ROAA at 0.97%, followed by the Midwest at 0.94%.
PRICING BY SIZE
While pricing continues to be proportional to asset size, the two largest bank groups with the greatest global exposure saw a price decline in during August. Banks greater than $10 billion reported a median price to tangible book multiple of 170% at August 2015 down 6% from 181% at June 2015 and banks between $5 billion and $10 billion reported a 2% decline from 190% of tangible book value to 186% (the highest among the groups) at August 2015. Banks between $1 and $5 billion in assets remained flat during August while banks less than $500 million, the smallest group, saw a 5% decline in tangible book value from 110% at June 2015 to 105% at August 2015. The only group which improved (3%) in value was the $500 million to $1 billion group at 109% of tangible. Interestingly, when Sheshunoff surveyed community bankers, over 60% believed banks needed to be greater than $500 million to produce satisfactory shareholder returns.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion reported the highest multiple of 17x, down 2% from 17.4x at June 2015, while the largest banks reported a median price to LTM earnings of 15.6x (again the largest decline – down 8% from June 2015). Banks with less than $500 million were also down 6% from 15.6x at June 2015 to 14.6x at August 2015. Again, banks between $500 million and $1 billion were the only group to improve on an LTM earnings basis and jumped 5% from 12.8x at June 2015 to 13.4x at August 2015. From a performance perspective, banks with assets greater than $1 billion reported the highest ROAA (greater than 0.90%) while banks less than $1 billion reported LTM ROAA between 0.71% and 0.82% on much higher NPA levels (greater than 1.15%).
Mergers & Acquisitions By Region
Bank consolidation continued at the same pace on a year-to-date basis through August 2015 with 167 transactions reported equaling the number of announced transactions for the January through August 2014 time period. Approximately 46% of the transactions announced in 2015 reported pricing terms, while 53% of the transaction in 2014 reported terms. Median year-to-date pricing through August 2015 was up 4.9% on tangible book (140%), 4.7% on 8% tangible book (147%), and 7.8% deposits (16.7%) but was down 1.5% on LTM earnings (22.5x) compared to year-to-date pricing through August 2014. Yet again, the Southwest Region had the highest price to tangible book multiple (165%) followed by the Midwest (150%). New England reported the highest price to LTM earnings (25.6x) but reported an ROAA of 0.37% while the Southwest reported a price to LTM earnings of 20.8x while reporting the highest ROAA (0.68%) and strong asset quality (NPAs/Assets 0.4%). While the North Central reported strong tangible equity at 10.4% resulting in lower price to tangible book multiples (105%) the North Central reported LTM earnings with a median ROAA of 0.54%, strong asset quality (NPAs/Assets 0.4%) which resulted in a median price to LTM earnings of 23.2x, pricing just below New England with much better performance.
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a median LTM ROAA of 0.52%, LTM ROAE of 5.33% and NPAs/Assets of 1.4%.
More information regarding nationwide M&A activity can be found here.