Public bank stocks decreased in January at a faster rate than the broader market due to concerns regarding market volatility in China and the continual decline of oil prices despite a positive domestic jobs report. The FOMC said it would keep its targeted federal funds rate between 0.25% and 0.50% after raising it in December. Helping to drive stocks lower was a Goldman Sachs report suggesting oil prices could fall to $20 a barrel before rebounding. There was positive news on the domestic employment front as total nonfarm payroll employment increased by 292,000 (beating the expectation of 200,000) in December 2015 and the unemployment rate was unchanged at 5.0%. Fourth-quarter real GDP data showed a 0.7% rise during the last three months of 2015, in-line with expectations. Further, the Bank of Japan made a surprising announcement that it would target negative interest rates for its benchmark rate, signaling they would do whatever is necessary to move inflation close to the bank’s 2% target. This helped broader markets and bank stocks rally late in the month. M&A pricing was down year-to-date through January compared to year-to-date pricing through January 2015 on similar volume (see chart below).
The SNL Bank Index fell 11.3% in January underperforming the S&P 500 which decreased 5.1% as banks between $1 billion and $5 billion dropped the most. The SNL Bank Index for banks between $500 million and $1 billion posted the best results in January, only decreasing 3.6% following a small increase in December. The largest banks, banks between $1 billion and $5 billion, posted the biggest decrease at 6.2% in January, followed closely by banks below $500 million which lost 6.0%.
In August 2015, market volatile increased with downward pressure on prices. Investors became increasingly worried about the state of the global economy due to the stock market sell-off in China, adding to the fear that the country’s economy was faltering. Adding to the concern was the lack of transparency in Chinese markets, creating further uncertainty about their market declines. A combination of fears regarding China’s uncertainty and the Fed’s decision to raise interest rates caused the markets to drop sharply in August and September, then slowly recovered through October and November as the market awaited a decision on an interest rate hike from the Fed. In December, the announcement of a 25 basis point increase in interest rates did little to outweigh the impact of falling oil prices on the market, which continued to drag down stocks through the month of January.
REGIONAL PRICING HIGHLIGHTS
All regions declined between 7% and 11% on a price to tangible book basis during January with the exception of the Southwest which declined nearly 20% and reported the lowest median pricing. The West, however, continued to report the highest median price to tangible book multiple based on superior financial performance.
At 1.52x tangible book, the Western region maintained the highest median price (down 7.5% from December 2015) as the region reported the highest ROAA (1.02%) and net interest margin (3.72%) on a last twelve month (“LTM”) basis among all regions. The Southwest region reported the lowest tangible book price of any region at 1.15x, down from 1.42x in December 2015 while the Mid-Atlantic was slightly higher at a price to tangible book of 1.30x (down 11% from December 2015). The Midwest and Southeast reported median tangible book pricing of 1.37x and 1.42x (down 7.6% and 8.3%, respectively from December 2015) while the Northeast reported 1.48x (down 7% from December 2015).
On a median price to earnings basis, the West and Southeast reported the highest pricing at 15.3x and 16.3x LTM earnings, respectively, followed by the Northeast (14.7x) and Mid-Atlantic (14.4x) with the Midwest and Southwest at 13.8x and 13.0x LTM earnings, respectively, 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 for the second straight month, 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 (1.16%). 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 an ROAA of 0.96%, 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 1.61x 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, dropping 10.6% in January to 1.01x, while banks between $500 million and $1 billion dropped the least (3.8%) of any group during the month to 1.06x. Mid-sized banks, those between $1 billion and $5 billion, decreased 4.9% since year-end 2015 and were priced at 1.41x tangible book. Banks over $10 billion dropped the most (12.7%) in January to 1.49x, while banks between $5 billion and $10 billion maintained the highest price to tangible book multiple at 1.73x down 7.0% since year-end 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, down 7.9% from year-end 2015, on the highest ROAA (1.01%) and lowest NPAs/Assets (0.65%). The largest banks reported a median price to LTM earnings of 13.7x, down 11.3% (the largest decline for any group) from year-end 2015 and reported the second highest ROAA (0.97%). Banks with less than $500 million reported the smallest increase since year-end 2015 (2.8%) to 15.4x and the lowest ROAA (0.40%). Banks between $500 million and $1 billion reported the lowest pricing at 13.4x earnings, but showed a 3.9% increase since year-end 2015 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 essentially the same pace on a year-to-date basis through January 2016 with 17 transactions and 17 reported during January 2015. Approximately 71% of the transactions announced in January 2016 reported pricing terms, while 65% of the transactions in January 2015 reported terms. Median year-to-date pricing through January 2016 was down at a 9.4% decrease on tangible book (1.30x), 3.9% decrease on 8% tangible book (1.46x), and 24.7% decrease on LTM earnings (16.2x) compared to year-to-date pricing through January 2015. The only exception was pricing on deposits which increased 4.6% to 15.7%. No transactions were reported in the Southwest Region (which typically has the highest price to tangible book multiples). The East – New England had the highest median price to tangible book multiple (1.39x) with the highest median ROAA (0.85%). The West followed the East – New England Region on price to tangible book (1.30x) reporting the highest tangible equity levels of 14.8% and highest ROAA of 2.63%. The South reported the highest price to LTM earnings (21.2x) on a median ROAA of 0.65%. Banks selling in the Midwest reported strong tangible equity at 10.1% resulting in lower price to tangible book multiples (1.29x). Three transactions were reported in North Central but did not disclose pricing.
More information regarding nationwide M&A activity can be found here.