Despite a year-end surge in bank stocks, numerous events in January beat bank stocks down although the overall U.S. economy remained strong. The SNL Bank Index retreated 10.1% in January and gave up nearly all 2014, gains edging up only 1.4% over the past twelve months. Banks underperformed the broader markets as the S&P 500 declined 3.1% in January, while the S&P 500 continued to post gains over the last twelve months ending up 11.9%. A continuing improvement in manufacturing, positive employment numbers and strong consumer sentiment was not sufficient to overcome an alarming concern over the precipitous drop in oil prices, a disappointing 4th quarter GDP, geopolitical problems, and underwhelming bank earnings caused by elevated legal costs, the decline in long-term rates and continued net interest margin pressure.
The largest financial institutions gave up the most in value with the SNL Bank Index for institutions between $1 billion and $5 billion declining 8.2% in January. With a seemingly strong correlation to size, banks between $500 million and $1 billion only gave up 1.8% and banks less than $500 million held their ground edging up 0.7%.
This trend extended back to January 2014 with the SNL Bank Index for institutions between $1 billion and $5 billion declining 1% while banks between $500 million and $1 billion grew 3.3% with banks less than $500 million growing 10.9% and nearly keeping pace with the S&P 500 growing 11.9% over the past twelve months.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective all regions showed a decline in value on a median price-to-tangible book basis in January compared to year-end 2014 and also down since June 2014 with the exception of the Southeast which saw a 1.2% increase from 130% tangible book to 131% tangible book on an improvement in earnings as problem assets improved along with the regional economy. Southeast banks reported an 8 basis point increase in the median return on average assets (ROAA) during the 4th quarter which outpaced the Midwest reporting a 2 basis point improvement and the Northeast reporting a 1 basis point improvement. All other regions reported flat to a 1 basis point decline in ROAA.
The Southwest region reported a sharp decline on median price-to-tangible book to 145% down from 185% of tangible book at June 2014 on concerns over declining oil prices and their impact on energy markets in Texas and Louisiana. The Southwest also saw median price-to-earnings drop to 14.5x on a last twelve month basis (“LTM) similar to most other regions but down from 15.7x at June 30, 2014.
The West region reported the highest median price-to-tangible book at 148% although down 3.2% from 153% at June 30, 2014. Both the Southwest and West maintained strong equity levels, earnings and net interest margins during the 4th quarter with the West the only region to see a notable improvement in net interest margin of 5 basis points.
PRICING BY SIZE
Public bank pricing by size of institutions declined across all sizes in January and since June 2014 with the largest banks experiencing the greatest decline on a median price-to-tangible book basis. The only exception was for banks $500 million to $1 billion which remained relatively flat at 106% on a price-to- tangible book basis. While the largest banks reported the largest decline in pricing, they maintained the highest pricing multiples with Banks greater than $5 billion reporting a median price-to-tangible book of more than 150% and a median price-to-earnings of more than 14.5x LTM earnings.
Again, on median price-to-LTM earnings most groups declined during January as the markets were disappointed in earnings announcements for 2014 and continued the decline from June 2014 pricing levels. The only improvement was in the SNL Index for banks $1 billion to $5 billion which saw a slight uptick, reporting 14.3x LTM earnings, up from 14.1x LTM earnings at June 2014.
Financial institutions greater than $5 billion reported the highest median ROAAs while the smallest institutions less than $500 million reported the highest increase in ROAA improving 13 basis points during the 4th quarter of 2014 as NPAs/Assets improved 72 basis points and tangible equity improved 17 basis points, significantly outpacing all other size groups.
More information regarding nationwide M&A activity can be found here.