In the month of March the S&P 500 outperformed the SNL Bank Index, with an increase of 1.8% compared to a decrease of 5.4% for the SNL Bank Index. Bank stocks and the broader market traded around the monthly economic reports, yield curve concerns, optimism on a trade agreement with China, and Fed meeting results.
Indexes fluctuated somewhat between positive and negative through the first half of the month, with the SNL Bank Index slipping through the back half of March. Jobs reports were mixed to begin the month, with the pace of job creation falling sharply, while unemployment still went down as wages improved. Signs are pointing to the possibility of full employment for the U.S. There was increased scrutiny on the inverted yield curve, which had a downward effect on bank stocks through the end of the month. Trade negotiations with China are still slow going, with concrete deal terms and any signing ceremonies still a couple of months out.
In other related news, Fed Chairman Jerome Powell believes that U.S. banks are more resilient today and able to withstand periods of economic stress. The Fed kept interest rates unchanged following their March meeting and may not raise rates again until 2020. Powell went on to praise the capitalization levels and awareness of banks post-crisis and he does not think vulnerabilities are high.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 196,000 in March, beating the consensus estimates of 180,000. The unemployment rate was unchanged at 3.8% while the average hourly earnings for employees increased by 4 cents, or 0.1% month over month. In February, U.S. existing-home sales increased 11.8% from January. Sales are 1.8% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $249,500, up 3.6% from the prior year.
Bank M&A pricing was slightly down in March 2019 compared to March 2018 on the same number of transactions (see chart below).
The SNL Bank Index showed an overall decrease through the month dropping 5.4%, while the S&P 500 increased by 1.8% during the month. The SNL Bank Index was down in all size groups as banks between $1 billion and $5 billion decreased 6.6%, banks between $500 million and $1 billion decreased 0.2%, and banks below $500 million lost 2.3%.
Over the three month period ending March 2019, the SNL Bank Index increased 8.1% while the S&P 500 gained 13.1%. Over the prior twelve months, the SNL Bank Index decreased 10.4% while the S&P 500 increased 7.3%. Banks between $500 million and $1 billion decreased 1.8%, while banks with assets less than $500 million decreased 8.7%, and banks between $1 billion and $5 billion decreased 11.1%.
REGIONAL PRICING HIGHLIGHTS
In March, pricing was down across all regions. The Southwest experienced the largest decrease since February of 10.2%, yet remained the highest priced region on a price to tangible book multiple of 166.3%. The West remained the second highest priced region at a 157.1% price to tangible book after having decreased 8.7% in the month. The Southeast and Mid-Atlantic regions decreased 4.0% and 6.1% in March to multiples of 155.2% and 143.7%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest and Northeast decreased 7.1% and 5.2%, respectively, in the month to a price to tangible book of 155.6% and 155.0%, respectively. The Northeast became the second lowest priced region, and the Midwest region sits as the third highest priced region.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.28%), Net Interest Margin (3.75%), and asset quality (NPAs/Assets of 0.53%). The Southeast was the third lowest priced region, and had the second weakest loan demand (Loan/Deposits of 90.6%), the third weakest asset quality (NPAs/Assets of 0.61%) and middle of the road on profitability (ROAA of 1.20%) and NIM (3.68%). The Northeast region’s asset quality took a step back (NPAs/Assets of 0.66%) but the region kept the highest loan demand (Loan/Deposits of 96.3%). The Midwest region remained at the third strongest profitability with an ROAA of 1.24% and a third highest Net Interest Margin of 3.72%. The West remained the second most profitable region with an ROAA of 1.27% and had the best Net Interest Margin of 3.95%, the strongest asset quality (NPAs/Assets 0.37%), and improving loan demand with Loans/Deposits of 91.5%. The lowest priced region, the Mid-Atlantic, had the second lowest profitability with an ROAA of 1.09%, the third weakest asset quality (NPAs/Assets of 0.58%), but strong loan demand with Loans/Deposits of 96.2%.
On a median price to earnings basis, pricing decreased across each of the regions. The Northeast region decreased 9.1%, and is now the lowest priced region with a price to earnings multiple of 12.3x. The Southeast region remained the second highest priced region with a price to earnings multiple of 12.8x after a decrease of 7.3% in March. The Southwest region saw a price decrease of 6.9% in March to a price to earnings multiple of 14.0x, maintaining its position as the highest priced of the regions. The Mid-Atlantic decreased the 4.8% in March with a price to earnings multiple of 12.4x (second lowest in the group). The West decreased 4.1%, with a 12.7x price to earnings multiple, while the Midwest experienced a decrease of 6.9% to a 12.6x price to earnings multiple, remaining as the third highest of the regions.
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 March, that differential was 33.4% higher for the peers with assets greater than $1 billion on a price to tangible book basis. During March, pricing for the three groups with total assets over $1 billion decreased by 11.3% on a median price to tangible book basis to a price to tangible book median of 172.0%. The highest priced asset class is now the group with assets greater than $10 billion, which experienced a decrease in pricing of 11.2% to a 172.2% price to tangible book multiple, surpassing the 172.0 multiple of the banks with between $5 billion and $10 billion after decreasing 12.7%. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 5.1% to a price to tangible book multiple of 145.4%. The group with assets from $500 million to $1 billion and the group with less than $500 million (which constitutes only five companies) ended the month with price to tangible book multiples of 130.8% and 127.1%, respectively, with pricing for the $500 million to $1 billion group decreasing 3.3% while the group less than $500 million increased 2.4%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw the largest decrease in pricing of 8.7%. The group with assets between $500 million and $1 billion saw the smallest decrease in its price to earnings multiple, down 1.1% to 13.8x yet remains the second highest priced group. The two groups with assets between $1 billion and $5 billion and between $5 billion and $10 billion saw decreases in pricing of 5.9% and 5.8% to price to earnings multiples of 12.7x and 13.0x, respectively. The highest priced was the group with less than $500 million, decreasing 1.4% to a 16.3x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.78%) and loan demand (average Loans/Deposits of 92.4%) than institutions with assets over $1 billion (average of median LTM ROAA 1.23% and Loans/Deposits 92.9%).
Mergers & Acquisitions by Region
Bank consolidation was down through March 2019 as compared to March 2018 with 45 transactions announced through March 2019 (20 transactions with terms) compared to 51 transactions (22 with terms) through March 2018. Median pricing through 2019 was lower than 2018 on a price to tangible book decrease of 16.4% (median 1.61x), a price to 8% tangible book decrease of 21.9% (1.65x), a decrease of price to deposits of 28.6% (17.6%), and a price to earnings basis with a 41.2% decrease on LTM earnings (15.1x).
The South region continues to have the highest number of transactions and number of transactions with terms with 13 deals through March of which 7 reported terms. Transactions in the South reported the third lowest price to tangible book of the group with a multiple of 162%, the second lowest price to 8% tangible book (161%), and second lowest price to earnings (14.2x) but the third highest price to deposits at 18.3%. The West region has reported 4 deals in 2019 with 2 of them reporting terms, and reported the third highest pricing on a price to tangible book basis, third lowest price to 8% tangible book, and highest price to deposits (173%, 166%, and 24.1%, respectively). The Midwest and North Central had 10 and 7 transactions, respectively, in 2019 (4 and 2 with terms, respectively), with a 154% and 174% price to tangible book, respectively. The East – New England region logged 7 transactions (4 with terms) with a price to tangible book of 145% and the highest price to deposits of 16.7%. The Southwest had 4 deals through March, but none with deal terms.
More information regarding nationwide M&A activity can be found here.