Public bank stocks advanced in May on steady performance and outperformed the broader market despite mixed economic reports. Inconclusive signals on interest rates, soft consumer confidence, lower mortgage applications and a downward adjustment to first quarter 2015 real GDP influenced the broader market but did not hold bank stocks down. Financial markets favored bank stocks, as treasury bonds advanced during the month, reported earnings improved and merger and acquisition activity year to date ticked up on higher median pricing. (See below)
According to the FDIC, compared to the previous year, insured institutions reported an improvement in earnings (6.9%) from higher non-interest income (4.6%) and net interest income (1.5%) despite a lower average net interest margin as higher-yielding assets matured. The average return on assets for FDIC-insured institutions increased slightly (1.02% vs. 1.01%) from the same period last year. While provision expense increased year-over-year (9.9%), banks reported an improvement in asset quality with non-current loans declining (6%) in the first quarter of 2015 while charge-offs fell (13.2%) compared to the first quarter of 2014, according to the FDIC. Asset growth edged 1.4% higher during the first quarter of 2015 while loan and lease balances squeaked ahead (0.6%) with commercial and industrial loans advancing the most (1.9%). Credit card balances and agricultural production loans posted seasonal declines at 5.4% and 8.3%, respectively while home equity lines of credit fell (1.7%) as reported by the FDIC.
The SNL Bank Index improved 2.4% in May, out pacing the S&P 500 increase of 1%. The SNL Bank Index for banks between $1 billion and $5 billion in assets edged up 0.9%, after declining 1.2% in April while banks between $500 million and $1 billion in assets, declined 0.6% in May after growing 2.7% in April and banks less than $500 million in assets continued to improve 2.7% after growing 2.1% in April.
Over the past three months, the SNL Bank index of 4.2% outpaced broader market growth with the S&P 500 index growing 0.1%. Banks with assets below $500 million reported the highest growth at 5.7% while banks between $1 billion and $5 billion followed at 3.3% and banks between $500 million and $1 billion grew only 0.9%.
Over the past year, banks lagged the broader markets as the S&P 500 grew 10.7% while the SNL Bank Index grew 9.8%, with banks under $1 billion in assets growing less than 8% and banks between $1 billion and $5 billion growing 5.8%.
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 14% from June 2014 levels as oil and gas prices declined. The Southwest reported a median price to tangible book multiple of 158% up slightly from 155% at April 30, 2015 while the West reported 152% of tangible book down slightly from 153% at April 30, 2015. At March 31, 2015, both regions reported the highest levels of tangible equity earnings and net interest margins on a last twelve months (“LTM”) basis. The change in multiples among the regions was mixed. The Northeast (146% of tangible book) and Southwest (158% of tangible book) reported the strongest improvement on a price to tangible book basis improving 3.7% and 3.6%, respectively since March 31, 2014 while the Mid-Atlantic (134% of tangible book) West (152% tangible book) and Southeast (137% of tangible book) reported a decline of 2.3%, 1.7% and 1.3%, respectively.
On a median price to earnings basis, pricing ranged from 14.4x to 16.6x LTM earnings with the West, Southwest, Northeast and Southeast at the high end approximating 16x while the Mid-Atlantic and Midwest approximated 14.5x. The West reported the highest LTM ROAA at 1.01% followed by the Southwest and Midwest at 0.92%.
PRICING BY SIZE
While pricing, particularly on tangible book, continues to be proportional to size, the smallest banks, those below $500 million in assets, reported the strongest improvement in pricing at over 7% from March 31, 2015 to May 31, 2015. All other sectors reported an improvement on a median price to tangible book basis with the exception of banks between $5 billion and $10 billion which were down 2% during the same period. The banks with assets greater than $5 billion remained at the very highest pricing levels (170% to 180% of tangible book) while the banks between $1 and $5 billion (142% of tangible book) bridged the gap between the banks below $1 billion at the very low end of pricing (106% to 111% of tangible book). The largest financial institutions continue to report the highest return on average assets (0.97% to 1.02% ROAA) and best asset quality (0.84% – 0.87% NPAs/TA) while the smallest institutions are losing their LTM net interest margin advantage (3.65% – 3.67%) compared to the institutions between $1 billion and $10 billion at 3.71%) with institutions over $10 billion in assets reporting the lowest LTM net interest margin (3.22%).
The story remains the same for LTM price to earnings multiples. The banks with assets greater than $5 billion remained at the very highest pricing levels (16x – 16.6x LTM earnings) while the banks between $1 and $5 billion (15.1x LTM earnings) bridged the gap between the banks below $1 billion at the very low end of pricing (12x to 13.2x LTM earnings).
Most groups by size reported a lower price to LTM earnings multiple with the exception of banks over $10 billion which reported a 5.5% improvement and banks $1 billion to $5 billion reported a 1% gain. All other regions reported a price to LTM earnings decline ranging from 1.6% to 4.2% from March 2015 to May 2015.
Mergers & Acquisitions By Region
Bank consolidation continued at a slightly elevated pace on a year to date basis through May 2015 with 105 transactions up 6% from 99 announced transactions for same year to date time period in 2014. However, few deal terms were reported for the transactions announced with only 50% of the 2015 transactions reporting terms while 61% reported terms in 2014. On transactions which reported terms, median prices were approximately 9% to 13% higher in 2015, with the exception of earnings (-12.2%) which declined. Consistent with public bank stocks, the Southwest Region had the highest price to tangible book multiple (157%) however, the New England Region reported the highest price on an 8% tangible book basis (174%), price to LTM earnings 29.9x and on a price to deposits (20.9%).Compared to public bank banks, the 2015 banks transactions were lower performing financial institutions with a median ROAA of 0.57%, ROAE of 5.36% and NPA/TA of 1.1%.
Click here to view all the transactions announced in May 2015
More information regarding nationwide M&A activity can be found here.