In June 2016, public bank stocks had their first down month since February 2016 and underperformed the broader market as investors panicked following Britain’s vote to exit the European Union (EU). Anticipating a “remain in” vote, a reactionary sell-off reverberated throughout world markets and resulted in downward pressure on the sterling pound and the financial sector. Many large banks holding British currency were impacted as the sterling pound dipped to its lowest level in 35 years. The short term consequences of the Brexit vote left the U.K. without a leading political party, turmoil among U.K. citizens, potential credit rating downgrades and the long-term task of unwinding EU trade agreements. While the dust has yet to settle on the impact of the Brexit vote, some analysts think the impact on the U.S. economy should be relatively small, as the U.K. is only a small portion of the U.S. trade activity.
In other news, the FOMC voted unanimously to keep the federal funds rate between 25 – 50 basis points, citing the weak May jobs number as evidence that improvements in the job market have slowed. However, Federal Reserve Chair Janet Yellen said data could improve enough to lead to a July increase. The U.S. Labor Department announced the economy added 38,000 jobs in May, well short of expectations that non-farm payroll employment would increase by 158,000 jobs. The job gains were enough to reduce the jobless rate by 0.3 percentage points to 4.7%. According to the National Association of Realtors, adjusted existing-home sales in the U.S. were up 1.8% month over month in May, and the Federal Housing Finance agency said its house price index showed prices rose 0.2% in April from its March levels – a few signs that the market is improving.
M&A pricing was down year-to-date through June compared to year-to-date pricing through June 2016 on slightly lower volume (see chart below).
The SNL Bank Index dropped 7.2% in June, and underperformed the S&P 500 which increased a marginal 0.1% as banks between $1 billion and $5 billion posted the largest decrease of 1.9%. The SNL Bank Index for banks between $500 million and $1 billion was the best performer of the month, down only 0.4%, while banks less than $500 million fell 1.6% during the month.
Over the three month period ending June 2016, the SNL Bank Index increased 1.1% while the S&P 500 increased 1.9%. The trend differed over the prior twelve months as the SNL Bank Index declined 14% while the S&P 500 increased 1.7%.
REGIONAL PRICING HIGHLIGHTS
The Southwest was the only region to realize a gain in median price to tangible book (1.3%) in June. The increase in oil prices continues to drive pricing higher in the Southwest region, which is heavily tied to the energy sector. According to a Dallas Fed Energy Survey taken by oil and gas executives, business activity improved in the second quarter. The business activity index (the survey’s broadest measure of sentiment among Eleventh District energy firms) turned positive to 13.8%, up from negative 42.1% in the first quarter. Further, respondents to the survey were bullish on pricing, with over 70% of firms expecting oil prices to be higher one year from now. While it decreased in pricing in June (-4.1%), the West remained the highest priced region for the third consecutive month.
At 1.49x tangible book, the West region claimed the highest median price among all regions as the region reported the strongest median last twelve month (“LTM”) ROAA (1.03%) and the highest median net interest margin (3.71%) on a LTM basis. The Mid-Atlantic region reported the lowest median tangible book price of any region at 1.33x, but was down just 1.3% from 1.35x in May 2016, while the Southwest increased 1.3% to 1.43x book, now the second highest priced region. The Midwest and Southeast reported median tangible book pricing of 1.42x and 1.40x (down 4.8% and 6.9%, respectively from May 2016) while the Northeast reported a median 1.43x, down 4.3% from May 2016. While pricing generally declined in May, median prices are up across all regions except the Northeast since the first quarter of 2016.
On a median price to earnings basis, the Southeast reported the highest pricing at 16.3x LTM earnings while the Southwest reported 15.7x LTM earnings, followed by the Mid-Atlantic (15.3x), Northeast (15.0x) and West (14.9x) with the Midwest at a median 14.2x LTM earnings on the low end. Only the Mid-Atlantic region showed an increase in price to earnings since May 2016, increasing 0.2%, while the West showed the largest decrease on a price to earnings basis, down 3.9% from May 2016. The West continued to report the highest median LTM net interest margin (3.71%) followed by the Southeast region (3.65%) which continued to report the highest NPAs/Assets (1.06%). The West reported the highest median LTM ROAA at 1.03% followed by the Southwest region at 0.97% and Midwest at 0.96%. The Southwest region maintained a high premium during the last downturn due to strong oil and gas prices, but saw their values significantly cut during the continual fall in oil prices earlier this year. However, pricing in the Southwest has improved over the past few months on both price to tangible book and price to earnings with oil prices moving up and strong median earnings, strong loan to deposits at 88.9% and a net interest margin of 3.63%, the third highest.
PRICING BY SIZE
Pricing continues to be proportional to asset size and earnings, although only the smallest sized group gained on pricing in June. The banks between $5 billion and $10 billion had a median price of 1.85x tangible book (down 7.3% from May 2016), remaining the highest priced group, followed by banks greater than $10 billion at 1.54x (down 7.9% from May 2016), while the two smallest sized groups averaged a 1.15x multiple. The smallest banks, those below $500 million, were up 8.4% in June to 1.24x, while banks between $500 million and $1 billion remained the lowest priced group and decreased in the month of May (0.2%) to 1.06x. Mid-sized banks, those between $1 billion and $5 billion, decreased 2.8% since May 2016 and were priced at 1.40x tangible book.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion once again reported the highest multiple of 16.4x, but were down 4.0% from May 2016, on the highest median ROAA (1.03%) on strong median LTM net interest margin (3.68%) and lowest NPAs/Assets (0.75%). The largest banks reported a median price to LTM earnings of 15.4x, down more than any group at 4.3% from May 2016 and reported the second highest median ROAA (0.94%). Banks with less than $500 million surpassed the largest banks with a price to earnings ratio of 16.2x (up 0.2% since May 2016, the only group in positive ground for the month) but reported the lowest median ROAA (0.39%). Banks between $500 million and $1 billion reported the lowest pricing at 13.4x earnings and highest median LTM net interest margin (3.69%), while midsized banks between $1 billion to $5 billion posted mid-range pricing at 15.0x LTM earnings on the fourth highest median LTM net interest margins of 3.63% and median ROAA of 0.91%.
Mergers & Acquisitions by Region
Bank consolidation continued at a slightly slower pace on a year-to-date basis through June 2016 with 120 transactions compared to 129 reported through June 2015. Approximately 58% of the transactions announced year-to-date through June 2016 reported pricing terms, while 53% of the transactions through June 2015 reported terms. Median year-to-date pricing through June 2016 was down across the board at a 4.9% decrease on tangible book (1.33x), 4.7% decrease on 8% tangible book (1.40x), 18.3% decrease on LTM earnings (18.5x), and 4.9% decrease on deposits (16.1%) compared to year-to-date pricing through June 2015. Only one transaction was reported in the Southwest Region with pricing (which typically has the highest price to tangible book multiples) which had a price to tangible book multiple of 1.74x on tangible equity to assets of 14.4%, NPAs/Assets of 0.8% and ROAA of 1.40%. The East–New England and West regions had the next highest median price to tangible book multiples (1.39x and 1.34x, respectively). The West region reported the highest price to LTM earnings (22.0x) on a median ROAA of 0.68%. Banks selling in the Midwest reported strong median tangible equity at 10.5% of assets and lower median price to tangible book multiples (1.30x). Twenty-four transactions were reported in North Central year-to-date with only four disclosing pricing (median 1.28x tangible book).
More information regarding nationwide M&A activity can be found here.