Public Bank Stock Performance – February 2016
Public bank stocks continued their decline in February at a faster rate than the broader market as market uncertainty continued over the economy while oil prices declined. Oil prices, which have driven much of the market volatility in 2016, continued to fall in February. Oil prices rallied mid-month on rumors of a production cut among OPEC countries, but at month-end, U.S. crude inventories were at record highs with no final production agreement in place. The Federal Open Market Committee’s January meeting minutes were released, which discussed divergent economic signals such as labor market strength, global and domestic financial instability and tightening, and falling energy prices, increasing domestic uncertainty and downside risk. Markets support was found in news that the U.S. Commerce department revised its estimate of GDP growth upward in the fourth quarter of 2015. The new estimate shows GDP growth was 1.0%, up from the earlier estimate of 0.7% for the same period. The agency also reported that personal and disposable personal income were both up 0.5% in January, compared to 0.3% increases in December. Further, consumer spending increased 0.5% in the first month of 2016, up from 0.1% in December 2015, suggesting that consumers are doing well. M&A pricing was down year-to-date through February compared to year-to-date pricing through February 2015 on slightly lower volume (see chart below).
The SNL Bank Index fell 5.9% in February underperforming the S&P 500 which decreased 0.4% as banks between $1 billion and $5 billion dropped the most dropping 3.5%. The SNL Bank Index for banks less than $500 million posted the best results in February, only decreasing 0.9% following a decrease in January. Banks between $500 million and $1 billion lost 1.9% during the month.
Over the three month period ending February 2016, the SNL Bank Index declined a whopping 19.5% as influenced by banks between $1 billion and $5 billion which dropped 13.1% while the S&P 500 declined only 7.1%. The trend continued over the prior twelve months as the SNL Bank Index declined 14.3% while the S&P 500 declined 8.2%.
REGIONAL PRICING HIGHLIGHTS
Southwest region saw the largest increase in price to tangible book in February yet remained the lowest price among regions. The Northeast, however, surpassed the West in tangible book pricing as the West saw a decrease in February resulting in the highest price to tangible book pricing in the Northeast although reported to report the highest price to tangible book pricing based on the best credit quality.
At 1.51x tangible book, the Northeastern region claimed the highest median price among all regions (up 2.4% from January 2015) as the region reported the lowest NPAs/Assets (0.66%) and highest loan/deposit ratio (94.1%) on a last twelve month (“LTM”) basis. The Southwest region reported the lowest tangible book price of any region at 1.19x, up (3.5%) from 1.15x in January 2015 while the Mid-Atlantic was slightly higher at a price to tangible book of 1.29x (down 0.8% from January 2015). The West and Southeast reported median tangible book pricing of 1.51x and 1.39x (down 0.8% and 2.2%, respectively from January 2015) while the Midwest reported 1.38x (up 0.8% from January 2015).
On a median price to earnings basis, the Southeast reported the highest pricing at 16.0x LTM earnings while the West and Northeast each reported 15.3x LTM earnings, followed by the Mid-Atlantic (14.5x) and Midwest (13.7x) with the Southwest at 13.0x LTM earnings on the low end. The West region showed the smallest loss since year-end 2015, decreasing 3.0%, while the Southwest showed the largest decline on a price to earnings basis, down 11.0% from year-end 2015. The Southeast region reported the second highest LTM net interest margin (3.68%) but continued to report the highest NPAs/Assets (1.33%). The West region is now reporting the highest LTM median ROAA at 0.98% followed by the Southwest and Midwest both at ROAAs of 0.95%. The Southwest region maintained a high premium during the last downturn due to strong oil and gas prices, but has since seen their values decimated during the current fall in oil prices, now at the bottom range of pricing on both price to tangible book and price to earnings despite strong median earnings, strong loan to deposits at 90% and a net interest margin of 3.6%, the third highest.
PRICING BY SIZE
Pricing continues to be proportional to asset size and earnings, as the two largest sized bank groups averaged a 1.60x price to tangible book multiple, while the two smallest sized groups averaged a 1.03x multiple. The smallest banks, those below $500 million, continued to have the lowest price to tangible book multiple, remaining flat in February at 1.01x, while banks between $5 billion and $10 billion remained the highest priced group and was the only group to increase in the month of February (0.5%) to 1.74x. Mid-sized banks, those between $1 billion and $5 billion, decreased 0.2% since January 2015 and were priced at 1.41x tangible book. Banks over $10 billion dropped the most (1.7%) in February to 1.46x, while banks between $500 million and $1 billion reported a price to tangible book multiple at 1.06x down 0.2% since January 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 15.7x, flat from January 2015, on the highest ROAA (1.01%) and lowest NPAs/Assets (0.65%). The largest banks reported a median price to LTM earnings of 13.5x, down 1.3% (the only group to decline) from January 2015 and reported the second highest ROAA (0.97%). Banks with less than $500 million reported the second highest price to earnings ratio of 15.4x (flat since January 2015) and the lowest ROAA (0.40%). Banks between $500 million and $1 billion reported the lowest pricing at 13.4x earnings, but is the only group to show an increase since year-end 2015 (1.5%) while midsized banks between $1 billion to $5 billion posted mid-range pricing at 14.5x LTM earnings on the highest LTM net interest margins of 3.66%.
Mergers & Acquisitions by Region
Bank consolidation continued at slightly slower pace on a year-to-date basis through February 2016 with 34 transactions and 37 reported during February 2015. Approximately 65% of the transactions announced year-to-date through February 2016 reported pricing terms, while 43% of the transactions through February 2015 reported terms. Median year-to-date pricing through February 2016 was down across the board at an 8.2% decrease on tangible book (1.29x), 2.0% decrease on 8% tangible book (1.45x), 17.8% decrease on LTM earnings (18.2x), and 7.1% decrease on deposits (15.4%) compared to year-to-date pricing through February 2015. Only one transactions was reported in the Southwest Region (which typically has the highest price to tangible book multiples) which had a price to tangible book multiple of 1.74x due to a 1.40% ROAA and an equity level of 14.4%. The West and East–New England regions had the next highest median price to tangible book multiples (1.34x and 1.33x, respectively). The South reported the highest price to LTM earnings (29.5x) on a median ROAA of 0.46%. Banks selling in the Midwest reported strong tangible equity at 10.8% of assets and lower median tangible book multiples (1.26x). Eight transactions were reported in North Central but only two disclosed pricing (0.57x tangible book at the median).
More information regarding nationwide M&A activity can be found here.Back to the Knowlege Center