In December 2016, stock markets continued on an upward trend from the record-high levels set in November after Donald Trump won the presidential election. As investors settled into the thought of a Trump presidency, the SNL Bank Index increased 5.6% in December. Many believe the positive trend is based on a shift in investor sentiment, which involves a pro-growth, pro-business, and less regulatory environment going forward. However, some argue the uncertainty surrounding a Trump presidency should be a cause for concern. According to SNL Financial, one analyst thinks we are seeing trade momentum based on hope and that “We are not really dealing with facts as we don’t know exactly what the new administration will do.” Relations with other countries specifically related to trade and geopolitics may impact market as the Trump’s administration begins developing and implementing policy.
In economic news, the U.S. Labor Department announced that total nonfarm employment added 178,000 nonfarm payroll jobs in November as the unemployment rate dropped to 4.6% after decreasing to 4.9% in October. Consensus estimates had monthly job gains increasing 170,000 while unemployment forecasts pegged the rate at 4.9%. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced sales of new single-family houses in November were at a rate of 592,000, which was a 5.2% increase from October, beating the consensus pace of 575,000. The Case-Schiller U.S. National Home Price NSA Index posted a 5.6% annual gain in October, extending from the all-time high set in September. Further, the Conference Board Consumer Confidence Index increased again in December and stands at 113.7, up from 109.4 in November.
In other news, top Federal Reserve officials announced a widely anticipated 25 basis point increase in the target range of the U.S. central bank’s key interest after their final monetary policy meeting of 2016. The FOMC voted unanimously to lift the target range for the federal funds rate to between 50 basis points and 75 basis points. The central bank noted job gains have been solid in recent months while the unemployment rate has fallen. The Federal Reserve further adjusted anticipated rates hikes in 2017 down from three to only two.
Bank M&A pricing was down year-to-date through December compared to year-to-date pricing through December 2015 on lower volume (see chart below).
The SNL Bank Index increased 5.6% in December, and outperformed the S&P 500 which increased 1.8%, while banks between $1 billion and $5 billion gained 12.0%, banks between $500 million and $1 billion increased 8.5%, and banks below $500 million posted an increase of 5.9% during the month.
Over the three month period ending December 2016, the SNL Bank Index increased 28.8% while the S&P 500 increased 3.3%. The trend remained over the prior twelve months as the SNL Bank Index increased 19.1% while the S&P 500 increased 7.6%.
REGIONAL PRICING HIGHLIGHTS
The Southwest region saw the largest increase in median price to tangible book (14.7%) in December while the Northeast remained the highest median pricing among all regions. An 8.8% increase in oil prices in December supported a pricing jump of 14.7% in the Southwest region, which is heavily tied to the energy sector. This is the fifth straight month in which bank pricing increased in the Southwest. While all regions were up in December, the West, typically a strong performer, saw the smallest increase in median price to tangible book, gaining 7.9%. The highest priced Northeast region gained the second most ground on price to tangible book in December at 10.1%.
At 2.12x tangible book, the Northeast region claimed the highest median price among all regions for the fourth straight month as the region reported strong loan demand reflected in the highest loan to deposit ratio (97.0%) and strong median NPAs/Assets (0.72%, the second lowest level). The Mid-Atlantic region reported the lowest median tangible book price of any region at 1.75x, but was up 8.3% from November 2016, while median pricing in the Southwest reported a median 2.05x tangible book after growing 14.7%. The West reported a median price to tangible book multiple of 1.92x after growth the least of the regions but was comparable to the Southeast and Midwest which reported median tangible book pricing of 1.92x and 1.93x (up 9.4% and 9.2%, respectively, from November 2016).
On a median price to earnings basis, the Southwest reported the highest pricing for the fourth straight month at 22.3x LTM earnings while the Northeast followed closely reporting a 21.2x LTM earnings (up 12.1%), followed by the Southeast (20.4x), Mid-Atlantic (20.2x) and West (20.0x) with the Midwest at a median 19.5x LTM earnings on the low end. The Mid-Atlantic (up 8.6%) and Southeast (up 3.8%) were the only regions which was their price to earnings multiple grow less than 10% since November.
PRICING BY SIZE
The disparity of pricing based on size grew during December as the two largest groups saw median tangible book pricing multiples grow to an average price to tangible book multiple of 2.38x while the two smallest groups grew to an average price to book multiple of 1.27x multiple. The banks between $5 billion and $10 billion reported a median price of 2.61x tangible book (up 5.7% from November 2016), remaining the highest priced group, followed by banks greater than $10 billion at a median of 2.15x (up 8.2% from November 2016). The smallest banks, those below $500 million, were up 8.4% in December to a median of 1.24x, but are the lowest priced group as banks between $500 million and $1 billion increased 9.3% during the month of December to a median of 1.30x. Mid-sized banks, those between $1 billion and $5 billion, increased 11.8% since November 2016 and were priced at a median 1.92x tangible book, essentially midway between the smallest and largest public institutions.
On a median price to LTM earnings basis, banks with assets between $1 billion and $5 billion were up the highest of any group at 12.9% in December to a median of 20.6x. Banks $1 billion and larger traded at a median price to LTM earnings of 20.6x or higher while banks below $1 billion traded at median price to LTM earnings of 17x or lower. The nine Banks with assets below $500 million were the only group to decrease on a price to earnings basis during December (6.9%) to 16.2x, the lowest of any group. Banks between $500 million and $1 billion reported the lowest median ROAA (0.81%) and asset quality (NPAs/Assets of 1.31%) while maintaining the highest median tangible equity to tangible assets (9.51%).
Mergers & Acquisitions by Region
Bank consolidation continued at a slightly slower pace on a year-to-date basis through December 2016 with 226 transactions compared to 262 reported through December 2015 on a similar month to month comparison. The gap widened in December 2016 as 19 transactions were announced in December 2015 compared to 11 in December 2016. Approximately 57% of the transactions announced year-to-date through December 2016 reported pricing terms, while 54% of the transactions through December 2015 reported terms. Median year-to-date pricing through December 2016 remained mostly down at a 2.4% decrease on tangible book (1.39x), 14.0% decrease on LTM earnings (19.5x), and 2.5% decrease on deposits (16.7%) compared to year-to-date pricing through December 2015, while price to 8% tangible book increased 1.6% (1.52x). In the Southwest Region only seven transactions were reported with pricing on a year-to-date basis through December. Prior to October, the Southwest Region reported the lowest median price to tangible book multiple. However, the four transactions of the year reported with pricing in the region in November and December had an average price to tangible book multiple of 1.93x, bringing the median to 1.74x for the region, the highest of any region, as the targets had the strong earnings (0.71%). The North Central region reported the lowest pricing multiples on the nine transactions which disclosed terms and reported a median price to tangible book of 1.31x and median price to LTM earnings of 14.2x. The Midwest reported the most transactions at 58 year-to-date, 34 with terms announced at a median price to tangible book of 1.37x and price to LTM earnings of 18.2x. The South region reported 36 transactions with terms (out of a total of 48 year-to-date) with a median price to tangible book of 1.45x and price to LTM earnings of 19.6x.
More information regarding nationwide M&A activity can be found here.