Public bank stocks decreased at a faster rate than the broader market in December as concerns over the Chinese central bank signaling that it may peg the yuan to a broader array of currencies than its current dollar-based system and worries over a global slowdown due to low crude oil prices which outweighed the Federal Reserve’s long-awaited decision to increase rates and positive employment numbers. Fed Chair Janet Yellen said it is important not to “overblow” the significance of the 0.25% increase in interest rates (the first increase in about a decade). She mentioned that the outlook and incoming data will determine policy and that the Fed is doing what it can to support the economy. While it is a step in the right direction, some think real change will occur once rates reach 100-150 basis points, although the timing of such increases is uncertain. That type of rate increase may not be likely to come in 2016 since it is an election year. November employment numbers were strong with an increase in private sector employment of 217,000 jobs and October jobs numbers were revised up from 182,000 to 196,000.
The SNL Bank Index fell 3.6% in December underperforming the S&P 500 which decreased 1.8% as banks between $1 billion and $5 billion dropped the most. The SNL Bank Index for banks between $500 million and $1 billion was the only segment to post an increase in December, gaining 0.4%. The largest banks, banks between $1 billion and $5 billion, posted the biggest decrease at 4.0% in December, followed by banks below $500 million which lost 1.4%, lagging its 3.6% gain in November.
4th Quarter Review
The fourth quarter of 2015 was generally positive for U.S. equity markets although returns were generally uneven, with a majority of the gains being frontloaded during the month of October. The month of November was generally flat with December posting mostly negative returns. The gains early in the quarter were driven in part by investors realizing that the concerns about China that had surfaced over the summer were probably somewhat overblown at that point in time. At the start of the quarter, the currency and stock market stabilized with investors focusing on the services sector which remained robust even as the manufacturing side of the economy was slowing. Again, the major news of the quarter was the long-awaited Federal Reserve decision to finally embark on increasing interest rates.
The banking sector continues to face elevated regulatory pressures and continued pressure on net interest margins in today’s continued low interest rate environment, even though the Fed raised rates by 25 basis points in mid-December. The SNL Bank Index increased by 5.4% during the fourth quarter of 2015 after decreasing by 8.7% during the third quarter and ended the year down by approximately 0.3% for all of 2015. By comparison, smaller banks posted weaker returns during the fourth quarter, with the SNL Bank less than $500 million index decreasing by 2.0% after increasing by 4.9% during the third quarter of 2015 with the index being up by about 11.7% for all of 2015. The SNL Bank $1 billion to $5 billion index posted an increase of 5.8% during the fourth quarter compared to the modest decrease of 0.9% during the third quarter, ending 2015 up by 9.9% for the year. By comparison, the S&P 500 was up by approximately 6.5% during the fourth quarter of 2015 and is now down by 0.7% for all of 2015. The S&P 500 was up by approximately 43.3% during the past three year period compared to the 47.4% increase for the SNL Bank Index. The SNL Bank $1 billion to $5 billion index posted a three year gain of 61.1% with the smaller SNL Bank less than $500 million index increasing by 64.3%.
REGIONAL PRICING HIGHLIGHTS
All regions reported gains on a tangible book basis with the exception of the Southwest which continued its decline as oil prices dropped leaving the region at the low end of regional pricing while the West maintained pricing at the high end based on superior financial performance.
The Western region maintained the highest tangible book pricing at 1.66x (up 2.4% from November 2015) and price to earnings at 16.7x (flat from November 2015), as the region reported the highest ROAA (0.99%) and net interest margin (3.85%) on a LTM basis among all regions. The Southwest region reported the lowest tangible book price of any region at 1.42x, down from 1.51x in November 2015 while the Mid-Atlantic was slightly higher at a price to tangible book of 1.44x (up 4% from November 2015). The Midwest and Southeast both reported tangible book pricing of 1.50x (up 0.7% and 3.1%, respectively from November 2015) and the Northeast reported 1.57x (up 4.5% from November 2015 and the largest increase among regions).
On a median price to earnings basis, the West and Southeast reported the highest pricing at 16.7x and 17.2x LTM earnings, respectively, followed by the Northeast (15.6x) and Southwest (15.5x) with the Midwest and Mid-Atlantic at 15.1x and 15.4x LTM earnings, respectively, on the low end. The Midwest region showed the largest gain since November, increasing 3.3%, while the Southwest showed the largest decline on a price to earnings basis, down 1.0% from November 2015. The Southeast region reported the second highest LTM net interest margin (3.70%) but continued to report the highest NPAs/Assets (1.17%).
PRICING BY SIZE
Pricing continues to be proportional to asset size and earnings, however, the largest banks, those over $10 billion, reported the largest price decrease (5.2%) on a price to tangible book basis since November 2015 (for the second straight month) ending the year at 1.61x. The smallest banks, those below $500 million, dropped to the lowest price to tangible book multiple, dropping 1.1% in December to 1.10x and were in-line with banks between $500 million and $1 billion also at 1.10x although reporting a 2% gain during the month. Mid-sized banks, those between $1 billion and $5 billion, increased 2.4% since November 2015 and were priced at 1.51x tangible book. Banks between $5 billion and $10 billion maintained the highest price to tangible book at 1.91x, down 3.0% since November 2015.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion once again reported the highest multiple of 17.6x, down 0.5% from November 2015, on the highest ROAA (1%) and lowest NPAs/Assets (0.81%). The largest banks reported a median price to LTM earnings of 15.5x, down 2.5% from November 2015 and reported the second highest ROAA (0.98%). Banks with less than $500 million reported the largest decrease in November 2015 (8.8%) to 15.5x and the lowest ROAA (0.77%) but had seen an elevated price to earnings since June 2015 when jumping from 12.7x earnings at March 2015 to 15.6x earnings at June 2015 while earnings remained low. Banks between $500 million and $1 billion reported the lowest pricing at 14.1x earnings but was the only group to post an increase (2.6%) from November 2015 while midsized banks between $1 billion to $5 billion posted mid-range pricing at 15.8x LTM earnings on the highest LTM net interest margins of 3.70%.
More information regarding nationwide M&A activity can be found here.