In the month of July the SNL Bank Index outperformed the S&P 500 with the SNL Bank Index increasing 5.2% and the S&P 500 increasing 3.6%. Bank stocks and the broader market traded around economic growth, continued tariff talks, and second quarter earnings season kicking off.
Bank stocks and the overall market started the month off a little sluggish, as China and the U.S. continued to increase tariffs, and The Federal Reserve expressed their concerns over trade disputes. The U.S. and China continued back and forth with retaliatory tariff increase threats during the month, but the U.S. and E.U. agreed to hold off on new tariffs as they attempt to solve trade differences, easing trade tensions between the two economic powerhouses. Bank stocks and the market continued climbing mid-month after Federal Reserve Chairman, Jerome Powell, expressed his thoughts that the outlook for global growth remains strong, and former policy makers, Ben Bernanke, Tim Geithner, and Henry Paulson, all agreed in a statement that the banking market is a lot stronger now than during the 2008 financial crisis. Around continued talk of the Chinese tariffs on U.S. agricultural products, the U.S. is forming a short-term relief program worth up to $12 billion for farmers that could be affected by the tariffs. The S&P 500 steadily increased for the entire month of July while banks started off a little slower but finished with a strong back half of the month on good earning numbers and continued signs of regulatory easing among the industry. The month ended with the expectation that the Federal Reserve will maintain the current interest rate target level and wait until September for the next rate hike.
In other related news, Bank regulators proposed softening the capital hit banks will sustain once the current expected credit loss model, or CECL, goes into effect. Also in regulatory news, the U.S, House or Representatives passed the bipartisan JOBS and Investor Confidence Act of 2018, aimed at helping small businesses, entrepreneurs and investors. Lastly, Consumer Financial Protection Bureau Acting Director Mick Mulvaney continues to downsize the agency, downsizing the advisory board and cutting annual operating costs.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 213,000 in June, beating the consensus estimates of 195,000. The unemployment rate, however, jumped to 4.0% while the average hourly earnings for employees rose by five cents, or 0.1% month over month. In June, U.S. existing-home sales declined for a third straight month. Sales are 2.2% below the levels from a year-ago, according to the National Association of Realtors. The median existing-home price for all housing types was $276,900, an all-time high, up 5.2% from the prior year.
Bank M&A pricing was up significantly in July 2018 compared to July 2017 on a slightly higher number of transactions (see chart below).
The SNL Bank Index climbed for most of the month of July and ended the month up 5.2% in the month outperforming the S&P 500 which gained 3.6% during the month. While the SNL Bank Index was up in the month, banks between $500 million and $1 billion decreased 1.4%, banks between $1 billion and $5 billion decreased 0.2%, and banks below $500 million increased 1.3%.
Over the three month period ending July 2018, the SNL Bank Index increased 3.5% while the S&P 500 increased 6.4%. Over the prior twelve months, the SNL Bank Index and the overall market performed similarly, as it increased 13.9% while the S&P 500 increased 14.0%. Banks between $500 million and $1 billion increased the most by 18.9%, followed by banks with assets below $500 which increased 16.7%, and banks between $1 billion and $5 billion increased 13.5%.
REGIONAL PRICING HIGHLIGHTS
In July, regional pricing was down with all regions seeing a decrease except the Southwest and the West which increased 1.6% and 0.2% to a price to tangible book of 219.4% and 197.4%, respectively. The Southwest remained the highest priced region. The Southeast and Northeast regions remained second and third highest priced regions on price to tangible book after decreasing 2.2% and 2.9% in July to multiples of 203.3% and 200.3%, respectively. The Midwest region also saw a decrease in pricing of 1.8% in the month to a price to tangible book of 198.2%, and remained the third lowest price region. The West experienced a small price increase, but remained the second lowest price region at a price to tangible book multiple of 197.4%, while the Mid-Atlantic region saw the largest price decrease in the month (3.9%) to remain the lowest priced on a price to tangible book with a multiple of 174.4%.
Pricing remained strong among public banks in the Southwest supported by strong earnings (ROAA 1.05%), the second strongest Net Interest Margin (3.69%) and good asset quality (NPAs/Assets of 0.58%). The Southeast remained as the second highest priced region, but was not a top performing region as it had the second weakest loan demand (Loan/Deposits of 90.1%), had the lowest asset quality (NPAs/Assets of 0.79%) and was middle of the road on profitability (ROAA of 0.95%), but had an improved NIM of 3.67%. The Northeast region remained supported by the second strongest asset quality (NPAs/Assets 0.48%) and strong loan demand (Loan/Deposits of 95.3%). The Midwest region was the third lowest priced region although profitability was the best of any region with an ROAA of 1.08% and a Net Interest Margin of 3.67%. The West was the third most profitable region with an ROAA of 1.04% and had a Net Interest Margin of 3.84%, had the best asset quality (NPAs/Assets 0.45%), but was the second lowest priced region on weak loan demand with Loans/Deposits of 89.2%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.85%, had the second worst asset quality (NPAs/Assets 0.70%), but had strong loan demand with Loans/Deposits of 97.2%.
On a median price to earnings basis, all six regions experienced a decrease in pricing. The Northeast region saw the largest decrease in pricing of 9.5% to drop to the third highest priced region with a price to earnings multiple of 19.8x. The Southeast region dropped to the second highest priced with a price to earnings multiple of 20.3x after an 8.2% decrease in July. The Southwest region saw the smallest price decrease in pricing of 1.2% in July to a price to earnings multiple of 20.9x, claiming the top spot. The Mid-Atlantic was the third lowest priced region after decreasing 5.2% in July to a price to earnings multiple of 19.4x. The West and Midwest saw decreases of 6.9% and 6.5% and are now the two lowest priced regions on price to earnings multiples of 18.5x and 17.8x, 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 July, that differential was an approximately 68% higher median price to tangible book pricing for the peers with assets greater than $1 billion as the group with assets less than $500 million saw a large decrease in pricing in the month of July. During July, pricing for the three groups with total assets over $1 billion slightly increased 1.5% on a median price to tangible book basis with a price to tangible book median of 223.4%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, although the group experienced a decrease in pricing of 5.1% in July to a 227.6% price to tangible book. The group with assets greater than $10 billion was the only group to experience an increase in pricing in July with an increase of 1.5% to a median price to tangible book of 223.4%, but remained the second highest priced group. The groups with assets from $500 million to $1 billion and from $1 billion to $5 billion saw decreases in pricing of 2.6% and 4.6% in July to price to tangible book multiples of 142.6% and 185.0%, respectively. The group with assets less than $500 million (which constitutes only four companies) experienced a large decrease in pricing of 21.3% to a price to tangible book multiple of 123.4% in July. On a price to LTM earnings basis, the smallest bank group (less than $500 million) was the only group to see an increase in pricing (25.5%). The group with assets between $500 million and $1 billion experienced a decrease in its price to earnings multiples of 5.3% to 21.0x to remain the second highest priced group. The group with assets between $1 billion and $5 billion experienced a decrease in the median price to earnings multiple of 4.8% in July to 19.9x. The two groups with assets between $5 billion and $10 billion and assets greater than $10 billion saw decreases in pricing of 4.9% and 8.6% to price to earnings multiples of 19.6x and 17.3x, respectively, to remain the two lowest priced groups on a price to earnings basis.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.61%) but a slightly higher loan demand (average Loans/Deposits of 93.4%) than institutions with assets over $1 billion (average median LTM ROAA 1.06% and Loans/Deposits 92.0%).
Mergers & Acquisitions by Region
Bank consolidation has been up through July 2018 as compared to July 2017 with 160 transactions announced through July 2018, but only 88 transactions with terms, compared to 135 through July 2017, and 87 transactions with terms. July 2018 was another busy month on the Mergers and Acquisitions front with 29 deals announced. Median pricing in 2018 was substantially higher on a price to tangible book increase of 6.8% (median 1.74x), on a price to 8% tangible book increase of 9.9% (1.91x), on an increase of price to deposits of 6.9% (22.2%), and higher on a price to earnings basis with a 13.0% increase on LTM earnings (25.2x).
The South region continues to have the highest number of transactions and number of transactions with terms with 40 deals through July of which 25 reported terms. Transactions in the South reported the second highest price to tangible book with a multiple of 176%, the second highest price to 8% tangible book (198%), the second highest price to earnings (26.2x) and the second highest price to deposits wat 23.7%. The West region has reported 16 deals in 2018 with 13 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 (212%, 232%, and 24.2%). The high pricing in the West is supported by the strongest asset quality deals (NPAs/Assets of 0.38%), the highest level of profitability (ROAA 0.82%) and the largest median total assets. The Midwest and North Central regions both have had over 30 transactions a piece in 2018 with the Midwest having 35 (20 with terms), and the North Central having 32 (only six with terms). Both regions remained the two lowest priced on a price to tangible book (Midwest 159% and North Central 162%). The North Central region was the lowest priced region across all multiples. Although it was the second most profitable and had the second best asset quality, it was the smallest median total assets. The Midwest was priced generally below the median of all six of the regions on the other multiples. The East – New England and the Southwest each had just under 20 deals through July. The Southwest remained the third lowest priced on a price to tangible book basis of 1.71% and a price to 8% tangible book of 1.89%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.6x multiple with 14 transactions with pricing, but it was the least profitable region (LTM ROAA 0.51%).
More information regarding nationwide M&A activity can be found here.