Public bank stocks advanced in June on anticipated interest rate increases and positive U.S. economic reports while the broader market declined primarily over concerns of Greece’s debt default. While federal funds remained between zero and 0.25%, a majority of the committee members favored raising rates during 2015 as opposed to during 2016. This news along with an improvement in housing, consumer confidence, consumer spending, employment and the overall health of the U.S. signaling a rebound in the Gross Domestic Product sent public bank and thrift stocks higher during June. However, the broader markets could not shake the building tension in the Eurozone over Greece’s pending default. More M&A transactions year-to-date through June were reported year-over-year than in 2014 while pricing was flat to slightly down. (See below)
The SNL Bank Index improved 2.4% in June, outpacing the S&P 500 which declined 2.1%. The SNL Bank Index for banks between $1 billion and $5 billion assets edged up the most at a 5.9% increase after growing 0.9% in May while banks between $500 million and $1 billion in assets declined 0.2% but an improvement over their decline of 0.6% in May. Banks less than $500 million in assets continued to improve 1.6% after growing 2.7% in May.
2nd Quarter Review
A long list of woes tripped up investors during the second quarter of 2015: Greece defaulted on its debts, corporate earnings hit a wall and the U.S. economy remained mired in a rough patch. Greece’s debt standoff became front and center during the final week of the quarter, creating extreme price fluctuations within the stock and bond markets and leaving investors contemplating the prospect that the country just might depart the Euro zone. As of just a few weeks prior to the quarter end, stocks were poised to record decent gains, but they reversed course as the threat of a Greek default became increasingly likely. The second quarter ended with all eyes on Greece after the country failed to reach an agreement with its creditors. The impasse resulted in shuttered banks and imposed capital controls, at least until a July 5 referendum on whether to accept further austerity measures in exchange for a European bailout. Euro zone and domestic markets tumbled on news of the continuing debt drama.
The S&P 500 had been working its way toward its all-time high during June, but lost ground as the Greek crisis more than offset slowly improving economic data. The Federal Reserve maintains that future monetary policy decisions will be data-dependent and expects conditions to warrant an initial increase in short-term interest rates by the end of this year with future increases expected to be very gradual.
The SNL Bank Index increased by 7.1% during the second quarter of 2015 after decreasing by 3.2% during the first quarter and year-to-date June 30, 2015 up by approximately 3.6%. The SNL Bank Index declined by 3.0% during the last week of the second quarter as Greece riled the markets. Smaller banks posted similar returns during the second quarter, with the SNL Bank less than $500 million index increasing by 6.5% after increasing by 2.0% during the first quarter of 2015 with the index being up by about 8.7% for the first half of 2015. The SNL Bank less than $500 million index actually posted a 2.0% increase during the last week of the quarter. The SNL Bank $1 billion to $5 billion index posted an increase of 5.6% during the quarter compared to the decrease of 0.7% during the first quarter, ending June 30, 2015 up by 4.9%. By comparison, the S&P 500 was down by approximately 0.2% during the second quarter of 2015 and is up by a modest 0.2% during the first half of 2015. The S&P 500 was down by approximately 2.9% during the last week of the second quarter.
Over the past year, banks continued to outperform the broader markets with the SNL Bank Index improving 10.7% compared to the S&P 500 of 5.2%. Again, the smallest public banks, those below $500 million in assets, improved the most at 11.2%, while banks between $1 billion and $5 billion grew 9.4% and banks between $500 million and $1 billion grew 5.6%.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Southwest and Western regions continue to maintain the highest price to tangible book multiples with the Southwest down 8.6% from June 2014 levels as oil and gas prices began to stabilize. The Southwest reported a median price to tangible book multiple of 168%, up from 158% at May 30, 2015, while the West reported 158% of tangible book, up from 152% at May 30, 2015. Both regions reported the highest levels of tangible equity as of March 31, 2015 along with higher net interest margins and earnings on a last twelve months (“LTM”) basis, along with the Midwest. June pricing was up in each region on a price to tangible book basis. The Northeast (156% of tangible book, up 10.5%) and Southwest (168% of tangible book, up 9.8%) reported the strongest improvement on a price to tangible book basis since March 31, 2014 while the Mid-Atlantic (149% of tangible book, up 6%), the West (158% tangible book, up 2.6%) and Southeast (143% of tangible book, up 3.5%) and the Mid-Atlantic (137% of tangible book, up 1.3%) lagged reporting lower multiples and growth.
On a median price to earnings basis, pricing was up and ranged from 14.2x to 17.4x LTM earnings with the Southwest, West, Northeast and Southeast at the high end approximating 17x while the Mid-Atlantic and Midwest approximated 15x. The West reported the highest LTM ROAA at 1.00% followed by the Southwest and Midwest at 0.92%.
PRICING BY SIZE
Pricing, particularly on tangible book, continues to be proportional to size and the largest banks showed the most price improvement compared to the smallest banks. Banks with assets between $5 billion and $10 billion reported a median price to tangible book of 191% at June 2015, up 5% from 182% at June 2014 while banks greater than $10 billion reported a median of 182% at June 2015, up 4% year-over-year from 175% at June 2014. On the other end of the spectrum, banks with assets between $500 million and $1 billion reported a median price to tangible book of 105% at June 2015, down 0.87% year-over-year from 106% at June 2014 and banks below $500 million in assets reported a median price of 109%, down 0.51% year over year from 110%. The same was true for price to LTM earnings with the largest banks reporting a median price to LTM earnings of 17x (up 9% year over year at June 2014 for banks with assets between $5 and $10 billion) and 17.5x (up 12% year over year at June 2014 for banks greater than $10 billion). From a performance perspective, the largest banks reported the highest earnings on an LTM basis and the best asset quality (lowest levels of NPAs to Assets).
Mergers & Acquisitions By Region
Bank consolidation continued at a slightly elevated pace on a year-to-date basis through June 2015 with 129 transactions reported up almost 7% from 121 announced transactions for the January through June 2014 time period. Approximately 40% of the transactions announced in 2015 reported pricing terms, while 50% of the transaction in 2014 reported terms. Median year-to-date pricing through June 2015 was down 2% on tangible book, 2.2% on 8% tangible book, 0.4% on LTM earnings but was up 9.4% on deposits compared to year-to-date pricing through June 2014. The Southwest Region had the highest price to tangible book multiple (154%) followed by the Midwest (152%) both regions reported 10% tangible equity levels. New England reported the highest price to LTM earnings but reported an ROAA of 0.30% while the Southwest reported a price to LTM earnings of 21x while reporting the highest ROAA (0.71%) and the best asset quality (NPAs/Assets 0.5%). Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a median ROAA of 0.56%, ROAE of 5.33% and NPAs/Assets of 1.3%.
More information regarding nationwide M&A activity can be found here.