In February 2018, bank stock prices decreased 2.8% as the S&P 500 decreased 3.9% over the same time period. Bank stocks and the broader market were volatile in February in connection with a possible market correction from concerns of rising inflation, earnings announcements, and the changing of the guard with Jerome Powell now Chairman of the Federal Reserve Bank.
Bank stocks tumbled early in the month as the overall market and strong economic indicators supported the case for raising interest rates although the Federal Reserve kept rates steady in its January Federal Open Market Committee (“FOMC”) meeting. New Federal Reserve Chairman Jerome Powell was sworn into office, replacing Janet Yellen. In a message he reiterated the message that the Federal Reserve will remain vigilant against possible risks to the financial system and that the U.S. central bank will support further economic growth and price stability. The market selloff continued into the second week of February as many believed that the recent selloff was leading to a market correction and that the market was overbought. The overall market and SNL Bank index seemed to hit a trough after the second week of trading in the month reaching lows of the S&P 500 being down 8.6% and the SNL Bank index being down 8.1%. Bank stocks, along with the greater market, continued to trend upward mid-month as the market seemed to begin to come to terms with the potential for three rate hikes in 2018 as the case was strengthened by fresh economic indications of rising inflation and newly enacted tax reform, which the Fed expects to cause larger economic effects in the near term than it initially anticipated. Late in the month newly appointed Fed Chairman Powell’s optimism of the market sent stocks tumbling on fears that economic growth could increase inflation and lead policymakers to increase rates faster or more than signaled previously. Although the Fed officials have penciled in three rate hikes in 2018, not all of them agree that the Fed should be that aggressive. St. Louis Federal Reserve President, James Bullard, spoke out against going “too far, too fast” on rate hikes. Stocks ended the month like they started it, on a downward trend as upbeat market assessments lead to fear of increased rate hikes.
During his confirmation as Federal Reserve Chairman, Jerome Powell did not comment on market volatility but did note that the Fed’s effort on tightening monetary policy will continue. While Fed officials are mostly confident regarding the path of gradual rate increases the feeling is not unanimous. U.S. President Donald Trump also released his wish list for the Congressional budget which included restructuring of the Consumer Financial Protection Bureau which would shrink the Office of Financial; Research, and subject the Financial Stability Oversight Council to Congressional Appropriations.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 200,000 in January, beating consensus estimates of 175,000. The unemployment rate, meanwhile, remained 4.1%. The consumer price index rose 2.1% on an annual basis in January while core CPI, which excludes food and energy, was up 1.8, both above consensus expectations of 1.9% and 1.7%. In January, U.S. pending home sales slid 4.7% from the prior month to the lowest level in more than three years according to the National Association of Realtors. Average hourly earnings increased by $0.09 in the month to $26.74, up $0.75 year-over-year.
Bank M&A pricing was up significantly in February 2018 compared to February 2017 on a fewer number of transactions (see chart below).
The SNL Bank Index decreased 2.8% in February but outperformed the S&P 500 which lost 3.9% during the month. While banks below $500 million decreased the most at 4.1%, banks between $500 million and $1 billion posted the smallest decrease of 1.2%, and banks between $1 billion and $5 billion lost 3.5% during the month.
Over the three month period ending February 2018, the SNL Bank Index gained 6.0% while the S&P 500 increased by only 2.5%. Over the prior twelve months, the SNL Bank Index slightly outperformed the overall market, as it increased 15.2% while the S&P 500 increased 14.8%.
REGIONAL PRICING HIGHLIGHTS
Every region reported lower price to tangible book multiples while pricing in the Mid-Atlantic and the Northeast decreased the most at 4.1% and 4.0% respectively. The Mid-Atlantic remained the lowest priced region on a price to tangible book basis at 167.8%. The Southwest region remained the highest priced region after price to tangible book decreased 2.8% in February to 219%. The Southeast region had the smallest decrease in pricing in the month as pricing decreased only 0.6% to 190% to now be the second highest priced region just edging out the Northeast. The West region came in near the median of the group at 185% after declining 3.9% in February. The Midwest region remained the second lowest priced region after pricing decreased 2.7% in February to 182%. With a 4.0% decrease in pricing in the month the Northeast region dropped from the second highest priced region in January to the third highest in February with a price to tangible book of 189%.
Strong pricing among the Southwestern public banks was supported by strong earnings (ROAA 0.96%), Net Interest Margin (3.62%) and good asset quality (NPAs/Assets of 0.70%). The Southeast pricing decreased in the month although asset quality improved (NPAs/Assets 0.76%), loan demand increased (Loans/Deposits 90.0%) and Net Interest Margin edged up and remained the second highest at 3.63%. Loan demand remained strong in the Northeast region (Loan/Deposits of 94.4%), second to only the Mid-Atlantic region (Loan/Deposits of 97.4%) while the Net Interest Margin in the Northeast remained the weakest at 3.27% and ROAA remained seconded lowest at 0.80%. The West dropped to the third most profitable region (ROAA of 0.95%), although Net Interest Margin remained the highest (3.78%), and asset quality (NPAs/Assets of 0.73%) was the third highest. The Mid-Atlantic remained the lowest priced region on the weakest earnings (ROAA 0.77%) and the second weakest Net Interest Margin (3.47%) behind the Northeast but reported the strongest loan demand with Loans/Deposits of 97.4%.
On a median price to earnings basis, all regions decreased pricing in February with the Midwest decreasing the most, remaining the lowest priced region at 18.5x. The Southwest region remained the highest priced region on price to earnings after a 1.6% decrease in the month at 22.6x closely trailed by the Southeast region which only lost 0.7% in February and now has a median price to tangible book of 22.5x. The smallest decrease in pricing in the month was in the Mid-Atlantic region which lost 0.6% to a median price to earnings of 20.0x. The Northeast and the West regions lost 1.6% and 3.3% in pricing to median price to earnings of 20.0x and 20.1x respectively.
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 February, that differential was approximately 45% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During February, the pricing for the three groups with total assets over $1 billion decreased their median tangible book pricing by 3.2% averaging 206%. The $1 billion to $5 billion asset class saw the largest pricing decrease in the month of 3.6%. The highest priced asset class remained the group with assets between $5 billion and $10 billion which pricing was down 3.0% in February, at 225% price to tangible book. The group with assets $500 million to $1 billion saw the smallest decrease in price to tangible book in the month of 1.7% to 142% while the group with assets less than $500 million decreased 2.4% to 143%. On a price to LTM earnings basis, the smallest banks (less than $500 million) were the only group which remained the same in pricing and also remained the lowest priced group at a median price to earnings multiple of 19.6x due to much lower earnings (ROAA of 0.31%) than the larger groups by asset size. The three groups with assets over $1 billion reported an increase in pricing at an average median price to earnings of 20.3x while reporting median ROAAs between 0.84% and 1.00%.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.44%) but higher loan demand (average Loans/Deposits of 93.6%) than institutions with assets over $1 billion (average median LTM ROAA 0.94% and Loans/Deposits 92.0%).
Mergers & Acquisitions by Region
Bank consolidation in 2018 continued at a slightly slower pace as compared to February 2017 with 34 transactions announced in February 2018 compared to 37 in February 2017. However, median pricing in 2018 was substantially higher on a price to tangible book increase of 11.6% (median 1.94x), on a price to 8% tangible book increase of 18.0% (2.07x), on an increase of price to deposits of 4.5% (22.6%), and higher on a price to earnings basis with a 13.4% increase on LTM earnings (24.0x).
The South region reported the highest pricing across the board with a tangible book multiple at 2.20x, an 8% tangible book multiple 2.63x, and a price to LTM earnings of 42.9x (2 deals with terms). The West was the second highest priced on a tangible book and 8% tangible book multiple of 2.10x and 2.27x, and was the third most profitable region with a LTM ROAA of 0.76%[I think we are comparing the ROAA of the M&A Banks announced in the West.]. The East – New England only had one transaction with terms as the third highest priced region on a tangible book multiple and the Southwest was the third highest priced region on an 8% tangible book multiple of 2.00x with two transactions with pricing. The Midwest remained the lowest priced region, although it was the second most profitable on a LTM ROAA basis (0.70%) and has the best asset quality (NPAs/Assets of 0.30%), with five transactions with pricing and the North Central has eight transactions, but none with pricing.
More information regarding nationwide M&A activity can be found here.