In the month of December the SNL Bank Index was outperformed by the S&P 500, decreasing 14.5% while the S&P 500 decreased 9.2%. Bank stocks and the broader market traded around weak worldwide economic reports, Chinese tariff negotiations, and government tensions.
Indexes fell through the entirety of the month, with some slight pick-up heading into the New Year. The market began the month reacting to a November jobs and wage report that was more unfavorable than expected, setting the tone for somewhat of a tightening of the economy. Chinese tariff relations improved after the two countries agreed to delay additional tariff increases for a few months. The news didn’t help the market though, as global and domestic economic reports continued to be underwhelming. Sentiment stayed gloomy through the month as the partial government shutdown further dampened spirits. To finish the month, prices had a slight rebound, but with slow trading volume during the holidays, the uptick didn’t much impact the month’s underwhelming results.
In other related news, Mark Calabria is the newly appointed head of the FHFA, and many expect him to lead reforms at Fannie Mae and Freddie Mac, possibly getting them to privatization. At the SEC, suggestions are being taken regarding the possibility of altering short term reporting regulations for public companies. Any alterations will be aimed at aligning long term growth goals for companies with investor expectations for performance.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 312,000 in December, well above the consensus estimates of 177,000. The unemployment rate rose to 3.9% while the average hourly earnings for employees increased by eleven cents, or 0.4% month over month. In November, U.S. existing-home sales rose 1.9% from October. Sales are 7.0% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $257,700, up 4.2% from the prior year.
Bank M&A pricing was up significantly in December 2018 compared to December 2017 on a higher number of transactions (see chart below).
The SNL Bank Index showed an overall decrease through the month of 14.5%, outperformed by the S&P 500 which was down 9.2% during the month. The SNL Bank Index was down in all size groups as banks between $1 billion and $5 billion decreased 10.8%, while banks between $500 million and $1 billion decreased 6.10 in the month, and banks below $500 million dropped 6.1%.
Over the three month period ending December 2018, the SNL Bank Index decreased 17.1% while the S&P 500 fell 14.0%. Over the prior twelve months, the SNL Bank Index decreased 18.6% and the S&P 500 decreased 6.2%. Banks between $500 million and $1 billion decreased by 4.9%, while banks with less than $500 million decreased 14.0%, and banks with between $1 billion and $5 billion decreased 13.7%.
REGIONAL PRICING HIGHLIGHTS
In December, pricing was down across all regions. The Southwest experienced one of three double digit decreases for the regions in December of 11.1%, yet remained the second highest priced region on a price to tangible book multiple of 158.4%. The West became the highest priced region at a 159.9% price to tangible book after having the smallest decrease of 6.8% in the month. The Southeast and Mid-Atlantic regions decreased 12.8% and 9.5% in December to multiples of 144.5% and 141.0%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest region logged the second largest decrease in pricing of 12.3% in the month to a price to tangible book of 152.3%, and has become the third lowest priced region. The Northeast decreased 8.3% in December, and became the third highest priced region at a price to tangible book multiple of 156.9%.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.13%), Net Interest Margin (3.69%), and asset quality (NPAs/Assets of 0.61%). The Southeast was the second lowest priced region, and had the third weakest loan demand (Loan/Deposits of 91.5%), the weakest asset quality (NPAs/Assets of 0.69%), and had mediocre profitability (ROAA of 1.03%) and NIM (3.65%). The Northeast region’s asset quality is second worst in the group (NPAs/Assets 0.68%) but the region kept the highest loan demand (Loan/Deposits of 96.2%). The Midwest region had the strongest profitability with an ROAA of 1.14% and a strong Net Interest Margin of 3.70%. The West was the third most profitable region with an ROAA of 1.07% and had the best Net Interest Margin of 3.89%, the strongest asset quality (NPAs/Assets 0.45%), but weak loan demand with Loans/Deposits of 88.5%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.92%, the third weakest asset quality (NPAs/Assets 0.65%), but strong loan demand with Loans/Deposits of 95.5%.
On a median price to earnings basis, pricing decreased across the group. The Northeast region saw the largest decrease in pricing of 15.6%, and is now the third lowest priced region with a price to earnings multiple of 14.0x. The Southeast region remained the highest priced (tied) with a price to earnings multiple of 14.9x with a decrease of 13.7% in December. The Southwest region saw a price decrease of 12.8% in December to a price to earnings multiple of 14.9x, tying for the highest priced of the regions. The Mid-Atlantic decreased 8.2% in December with a price to earnings multiple of 14.8x. The second largest price decrease came in the West at 14.1%, staying the second lowest priced region with a 13.8x price to earnings multiple, while the Midwest experienced a decrease of 12.2% to a 13.2x price to earnings multiple, remaining the lowest of the regions.
PRICING BY SIZE
Size continues to impact bank stock prices. Financial institutions with total assets greater than $1 billion consistently report pricing approximately 50% higher median price to tangible book pricing than their peers with total assets less than $1 billion. In the month of December, that differential was 40.6% higher for the peers with assets greater than $1 billion on a price to tangible book basis. Pricing for the group with total assets over $10 billion decreased by 16.6% on a median price to tangible book basis in the month to a price to tangible book median of 160.3% and remained the second highest priced group. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experienced a decrease in pricing of 16.0% to a 174.7% price to tangible book multiple. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 11.5% to a price to tangible book multiple of 144.9%. The group with assets from $500 million to $1 billion and the group with less than $500 million (which constitutes only five companies) ended the month with price to tangible book multiples of 125.7% and 102.4%, respectively, with pricing for the $500 million to $1 billion group decreasing 6.5% while the group less than $500 million decreased 15.7%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw a decrease in pricing of 14.9%. The group with assets between $500 million and $1 billion experienced the only increase in its price to earnings multiple, up 0.4% to 16.9x and is the second highest priced group. The two groups with assets between $1 billion and $5 billion and between $5 billion and $10 billion saw decreases in pricing of 8.8% and 15.0% to price to earnings multiples of 15.1x and 14.2x, respectively. The highest priced was the group with less than $500 million, decreasing 12.2% to a 20.4x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.69%) but a slightly higher loan demand (average Loans/Deposits of 94.60%) than institutions with assets over $1 billion (average of median LTM ROAA 1.10% and Loans/Deposits 92.25%).
Mergers & Acquisitions by Region
Bank consolidation was slightly down through December 2018 as compared to December 2017 with 244 transactions announced through December 2018 (124 transactions with terms), compared to 247 through December 2017 (143 transactions with terms). December 2018 was still a busy month on the Mergers and Acquisitions front with 15 deals announced. Median pricing in 2018 was substantially higher than 2017 on a price to tangible book increase of 8.6% (median 1.76x), a price to 8% tangible book increase of 7.8% (1.88x), an increase of price to deposits of 2.6% (21.0%), and a price to earnings basis with a 14.9% increase on LTM earnings (24.5x).
The South region continues to have the highest number of transactions and number of transactions with terms with 56 deals through December of which 37 reported terms. Transactions in the South reported a strong to tangible book with a multiple of 181%, the second highest price to 8% tangible book (196%), the second highest price to earnings (25.2x) and the second highest price to deposits at 22.2%. The West region has reported 26 deals in 2018 with 21 of them reporting terms, and reported the highest pricing on a price to tangible book basis, price to 8% tangible book, and price to deposits (204%, 227%, and 23.6%, respectively). The high pricing in the West is supported by the strongest asset quality deals (NPAs/Assets of 0.40%), the second highest level of profitability (ROAA 0.78%) and the second largest median total assets. The Midwest and North Central regions each had over 40 transactions in 2018 with the Midwest having 51 (20 with terms), and the North Central having 44 (only seven with terms). Both regions remained in the bottom half of pricing on a price to tangible book (Midwest at 164% and North Central at 182%). The North Central region was the lowest priced region for price to 8% tangible book and price to deposits, second lowest in price to earnings, but third highest for price to tangible book. Although it was the third most profitable and had the second best asset quality, it was the smallest median total assets. The East – New England and the Southwest each eclipsed 30 deals through December (31 and 36, respectively). The Southwest stayed the second highest priced on a price to tangible book basis of 1.84% and mid-level on a price to 8% tangible book basis of 1.89%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.1x multiple with 24 transactions with pricing, but it was the least profitable region (LTM ROAA 0.50%).
More information regarding nationwide M&A activity can be found here.