Chris Noon

In the month of June the S&P 500 outperformed the SNL Bank Index which started the month strong but ended the month on a downward trajectory, ending down 1.7% as the S&P 500 gained 0.5%. Bank stocks and the broader market traded around a strong jobs report, continued trade war concerns, potential of denuclearization of the Korean peninsula, and U.S. rate hike news.

Bank stocks and the overall market started the month off trading up on a strong jobs report, reporting higher-than-expected payroll gains and a decrease in the unemployment rate. Bank stocks and the broader market continued a strong start to the month on easing fears of a trade war prior to the G-7 Summit and the North Korean denuclearization Summit. Banks began a downward trend just prior to a busy mid-month, prior to the beginning of the Federal Open Market Committee’s two-day meeting, which is expected to yield an increase in the Fed’s benchmark rate, and ultimately continuing flattening of the yield curve. At the same time, the U.S. and North Korea summit was wrapping up which continued to ease geopolitical fears and increase a growing prospect of economic cooperation in the region. Globally, stocks fell mid-month in the wake of the Fed’s announcement of the anticipated rate hike and signals of four total rate hikes in 2018. By the end of 2019 the Federal Reserve expects to have raised rates 12 times since the end of 2015. In the back half of the month bank stocks and the broader market continued a downward slide as continued fears of a trade war heightened with the U.S. and China going back and forth on additional tariff threats, along with escalation of retaliatory tariffs between the U.S. and the European Union. The S&P 500 ended slightly up for the month of June after starting the month strong while banks did not fare as well ending the month down after a very strong start to the month.

In other related news, the Commodity Futures Trading Commission advanced a proposal to tweak the Volcker rule, simplifying requirements under the rule, which bans proprietary trading at banks and limits their investments in hedge funds and private equity funds. The CFTC’s vote followed the Federal Reserve Board of Governors and the FDIC both approving the plan, along with the Comptroller of the Currency. Also in banking news, the Office of the Comptroller of the Currency found numerous instances of unauthorized account openings in review of sales practices of more than 40 banks. They have sent out letters to the participating banks, but have not released their findings publicly.

In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 223,000 in May, beating the consensus estimates of 190,000. The unemployment rate, meanwhile, fell to 3.8% while the average hourly earnings for employees rose by five cents, or 0.1% month over month. In May, U.S. existing-home sales declined below the prior month, and 3.0% below the levels from a year-ago, according to the National Association of Realtors. The median existing-home price for all housing types was $264,800, an all-time high, up 4.9% from the prior year.

Bank M&A pricing was up significantly in June 2018 compared to June 2017 on a slightly higher number of transactions (see chart below).

The SNL Bank Index started the month of June off strong but ended the month down 1.7% in the month, and was outperformed by the S&P 500 which gained 0.5% during the month. While the SNL Bank Index was down in the month, banks below $500 million increased 1.1%, banks between $500 million and $1 billion increased 4.2%, and banks between $1 billion and $5 billion increased 0.2% during the month.

Over the three month period ending June 2018, the SNL Bank Index decreased 1.5% while the S&P 500 increased 2.9%. Over the prior twelve months, the SNL Bank Index outperformed the overall market, as it increased 16.9% while the S&P 500 increased 12.7%. Banks between $500 million and $1 billion increased the most by 24.7%, followed by banks between $1 billion and $5 billion which increased 19.8%, while banks with assets below $500 million increased slightly less than the SNL Bank Index at 16.4%.

REGIONAL PRICING HIGHLIGHTS

In June, pricing increase was split with half of the regions seeing an increase while the other half saw a decrease. The Southwest region saw the largest decrease in pricing in June of 2.7%, but remained the highest priced region on a price to tangible book multiple of 216.0%. The Northeast region dropped to the third highest priced region after it saw a 1.2% decrease in pricing on a price to tangible book to 206.4%, and the Midwest region also saw a decrease in pricing of 0.2% in the month of June to a price to tangible book of 201.9%. The Southeast region saw the largest increase in pricing on a price to tangible book basis to become the second highest priced region at a price to tangible book multiple of 207.9% (a 2.5% increase). The West and the Mid-Atlantic both saw modest increases in pricing of 0.4% and 0.7%, respectively, but remained the two lowest priced regions on a price to tangible book multiple (West 197.0% and Mid-Atlantic 181.6%).

Pricing remained strong among public banks in the Southwest supported by strong earnings (ROAA 1.00%), the second strongest Net Interest Margin (3.68%) and good asset quality (NPAs/Assets of 0.66%). The Southeast reclaimed the spot as the second highest priced region, but was not a top performing region as it had the second weakest loan demand (Loan/Deposits of 89.7%), was tied for the lowest asset quality (NPAs/Assets of 0.75%) and was middle of the road on profitability (ROAA of 0.92% and NIM of 3.63%). The Northeast region remained supported by the second strongest asset quality (NPAs/Assets 0.66%) and strong loan demand (Loan/Deposits of 96.3%). The Midwest region was the third lowest priced region although profitability was strong with an ROAA of 1.03% and a Net Interest Margin of 3.66%. The West was the third most profitable region with an ROAA of 0.99% and had a Net Interest Margin of 3.82%, had the best asset quality (NPAs/Assets 0.47%), but was the second lowest priced region on weak loan demand with Loans/Deposits of 87.5%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.77%, was tied for the worst asset quality (NPAs/Assets 0.75%), but had strong loan demand with Loans/Deposits of 95.9%.

On a median price to earnings basis, only two regions saw an increase in pricing. The Northeast region saw the largest increase in pricing of 3.2% to move to the second highest priced region on a price to earnings multiple of 21.9x. The Midwest region also saw a small price to earnings increase in June of 2.0% to 19.0x, but remained the lowest priced region on a price to earnings multiples basis. The Southeast region became the highest priced on a price to earnings multiple of 22.1x although its pricing decreased 1.5% in June, as the Southwest region saw the largest decrease in pricing of 6.5% in June to a price to earnings multiple of 21.2x. The West saw the second largest decrease in price to earnings during June of 2.1% to a multiple of 19.9x while the Mid-Atlantic region saw a slight decrease of 0.7% as well to a price to earnings multiple of 20.5x.

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 June, that differential was an approximately 45% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During June, the pricing for the three groups with total assets over $1 billion slightly decreased their median price to tangible book 2.1% with a price to tangible book median of 220.1%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experience a small decrease in pricing of 1.9% in June, at a 239.7% price to tangible book. The group with assets greater than $10 billion saw the largest decrease in pricing in June of 2.1% to 220.1% price to tangible book, but remained the second highest priced group. The group with assets less than $500 million also saw a modest decrease in price to tangible book of 0.7% in June to a price to tangible book multiple of 156.7%. Both the groups with assets from $500 million to $1 billion and from $1 billion to $5 billion saw increases in pricing of 4.0% and 1.0% in June to price to tangible book multiples of 146.4% and 194.0%. On a price to LTM earnings basis, the two asset classes of the smallest banks (less than $500 million and assets between $500 million and $1 billion) both saw increases in pricing of 4.5% and 5.6%, to price to earnings multiples of 21.9 and 22.1x. The two groups with assets between $1 billion and $5 billion and $5 billion and $10 billion saw decreases in pricing of 1.6% to price to earnings multiples of 20.9x and 20.6x. The groups with assets greater than $10 billion saw the largest decrease in pricing (2.4%) and remained the lowest priced on a price to earnings multiple of 18.9x.

Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.38%) but a slightly higher loan demand (average Loans/Deposits of 92.0%) than institutions with assets over $1 billion (average median LTM ROAA 1.04% and Loans/Deposits 91.5%).

Mergers & Acquisitions by Region

Bank consolidation has been up through June 2018 as compared to June 2017 with 131 transactions announced through June 2018, but only 73 transactions with terms, compared to 114 through June 2017, and 75 transactions with terms. June 2018 was a busy month on the Mergers and Acquisitions front with 34 deals announced. Median pricing in 2018 was substantially higher on a price to tangible book increase of 8.8% (median 1.75x), on a price to 8% tangible book increase of 12.2% (1.93x), on an increase of price to deposits of 5.9% (22.1%), and higher on a price to earnings basis with a 15.9% increase on LTM earnings (25.1x).

The South region had the highest number of transactions and number of transactions with terms, was the highest priced on an 8% tangible book basis with a multiple of 2.33x, and second highest on a price to deposits basis of 23.0%, price to LTM earnings of 26.5x, and price to tangible book of 195%. The Midwest and North Central regions both have had 29 transactions in 2018 with the Midwest having 18 with terms and the North Central only having six with terms. Both regions remained the two lowest priced on a price to tangible book (Midwest 165% 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 around the median of all six of the regions on the other multiples. The West, the East – New England, and the Southwest all have had 14 deals a piece through June. The West region had 11 transactions with pricing, and was the highest priced region on a tangible book basis of 2.12x, highest on a price to deposits basis of 25.0%, and second highest on price to 8% tangible book with a multiple of 2.32x. The deals in the West region were the most profitable with an LTM ROAA and ROAE of 0.82% and 7.71%, and had the best asset quality (NPAs/Assets 0.40%). The Southwest saw a decrease in pricing to the third lowest priced on a price to tangible book basis of 1.71x and a price to 8% tangible book of 1.89x. The East – New England region remained the highest priced on a LTM earnings basis with a 32.4x multiple with 11 transactions with pricing, but it was the second least profitable region (LTM ROAA 0.51%).

More information regarding nationwide M&A activity can be found here.