Chris Noon

In the month of May the S&P 500 outperformed the SNL Bank Index which was flat as the S&P 500 gained 2.2%. Bank stocks and the broader market traded around a strong earnings season, geopolitical concerns, and legislative activity.

Bank stocks and the overall market started the month off trading down despite a strong earnings season as the Federal Reserve announced that it would be holding the benchmark rate at a target range of 1.50% to 1.75%. The Federal Open Market Committee made note that future rate hikes would be in store as the inflation figures have moved close to the Federal Reserve’s target of 2%. Bank stocks and the market saw a slight recovery from the rough start to the month as oil prices hit a recent high as President Donald Trump announced that the U.S. would withdraw from the Iran nuclear agreement and resume previous sanctions. As the energy and financial sectors continued to push the market upwards, the 10yr Treasury rate continued to rise mid-month. Markets continued to rally as the month continued as tensions between the United States and China over tariffs as reports that the two countries are working to finalize and agreement. Late in the month President Donald Trump called off his planned June summit with North Korean leader Kim Jong Un, pulling the market down. Bank stocks took another hit when markets began worrying about the political uncertainty in Italy which has cause a sort of flight to safety of U.S. Treasuries pushing the 10-year U.S. Treasury down which could put pressure on banks’ profits margins. Markets slipped again to end the month with the Trump administration’s decision to impose tariffs on steel and aluminum imports from Canada, Mexico and the European Union.

In other related news, President Donald Trump signed a legislative package that rolled back large portions of the Dodd-Frank Act. The move helped lift the banking sector in the month. Also in banking news, federal regulators began plans to remove a short-term trading assumption under the Volcker Rule as part of a proposed revamp and other rules that would ease regulations on banks. Thomas Barkin, President of the Richmond Federal Reserve, gave his take on monetary policy saying the economy is remarkably strong and that further interest rate increases are appropriate.

In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 164,000 in April, falling short of consensus estimates of 191,000. The unemployment rate, meanwhile, fell to 3.9% while the average hourly earnings for employees rose by four cents, or 0.1% month over month. In April, U.S. existing-home sales rose came in below the prior month, and 1.2% below the levels from a year-ago, according to the National Association of Realtors. The median existing-home price for all housing types was $257,900, up 5.3% from the prior year.

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

The SNL Bank Index continues to be volatile, but ended the month of May flat, outperformed by the S&P 500 which gained 2.2% during the month. While the SNL Bank Index was flat in the month, banks below $500 million decreased 2.4%, banks between $500 million and $1 billion increased 2.2%, and banks between $1 billion and $5 billion increased the most at 4.8% during the month.

Over the three month period ending May 2018, the SNL Bank Index decreased 5.2% while the S&P 500 decreased only 0.3%. Over the prior twelve months, the SNL Bank Index outperformed the overall market, as it increased 18.9% while the S&P 500 increased 12.2%. Banks between $500 million and $1 billion increased the most by 19.7% followed closely by banks between $1 billion and $5 billion which increased 19.5%.

REGIONAL PRICING HIGHLIGHTS

In April, all regions saw an increase in pricing, but the Southwest region saw the smallest increase in pricing on a price to tangible book of 1.6% and remained the highest priced region (price to tangible book 221.8%). The Northeast region saw the largest increase in pricing in the month with an increase of 6.8% to become the second highest priced region (price to tangible book of 208.8%). The Southeast, Midwest and West regions all saw moderate increases in pricing in April (2.7%, 4.5% and 3.1%) as the third, fourth and fifth highest priced regions at price to tangible book multiples of 202.8%, 202.4% and 196.3%. The Mid-Atlantic remained the lowest priced region after increasing 2.8% on a price to tangible book basis to a multiple of 180.4% in the month of May.

Pricing remained strong among the Southwestern public banks 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 Northeast improved to the second highest priced region, supported by the second strongest asset quality (NPAs/Assets 0.65%) and strong loan demand (Loan/Deposits of 95.6%). The Southeast region reported the third strongest pricing but on the second lowest loan demand (Loans/Deposits 89.7%) and asset quality that is tied for the weakest region (NPAs/Assets of 0.75%). The Midwest region was the third lowest priced region although profitability was the highest at and ROAA of 1.03% and a strong Net Interest Margin of 3.66%. The West was the third most profitable region with an ROAA of 0.99% and Net Interest Margin of 3.82% and had the best asset quality (NPAs/Assets 0.47%), but was the second lowest priced region in part of loan demand being the weakest among the regions with Loans/Deposits of 87.5%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.77% and was tied for the worst asset quality (NPAs/Assets 0.75%).

On a median price to earnings basis, all regions saw an increase in pricing, but the Northeast region saw the largest increase in pricing of 12.2% to the third highest price to earnings multiple of 21.2x. The West region saw the second largest increase in pricing in April (6.6%) but dropped to the second lowest priced region with a price to earnings multiple of 20.3x. Pricing in the Southwest region increased slightly more than in the Southeast region in May (3.5% and 2.6%) to become the highest priced region while the Southeast region drops to second highest priced region with price to earnings multiples of 22.6x and 22.5x, respectively. The Mid-Atlantic region saw an increase in pricing on a price to earnings basis of 2.7% in May to a multiple of 20.6x, dropping to the third lowest priced region. The Midwest previously was the lowest priced region and saw the smallest increase in pricing in the month (2.0%) to remain the lowest priced region with a median price to tangible book multiple of 18.6x.

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 May, that differential was an approximately 51% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During May, the pricing for the three groups with total assets over $1 billion slightly increased their median tangible book 5.4% with a price to tangible book median of 224.8%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experience the second largest increase in price of all the size groups, of 5.6% in May, at a 244.3% price to tangible book. The group with assets less than $500 million saw the largest increase in pricing in May of 10.9% to 157.8% price to tangible book, but remained the second lowest priced group. The groups with assets from $1 billion to $5 billion saw the third largest increases in pricing of 3.9% in the month to 192.1%. The group with assets greater than $10 billion saw an increase in pricing in the month of 0.7% to 224.8% price to tangible book. The lowest priced size group remained the group with assets between $500 million and $1 billion which saw the smallest increase in pricing in the month of 0.6% to 140.7% price to tangible book. On a price to LTM earnings basis, the smallest banks (less than $500 million) was the only asset class to decrease in May with a large decrease in pricing, to a price to earnings multiple of 21.0x. The group with assets between $1 billion and $5 billion saw the largest pricing increase of 6.2% to a price to earnings multiple of 21.3x, which was the highest median among all groups. The groups with assets between $500 million and $1 billion and the group with assets between $5 billion and $10 billion both saw an increase in pricing of 2.7% and 4.0%, respectively, to a price to earnings of 21.0x each. Lastly the group with assets greater than $10 billion saw an increase in price to earnings of 2.8% in May to remain the lowest priced group at 19.4x price to earnings.

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 1.00% and Loans/Deposits 92.2%).

Mergers & Acquisitions by Region

Bank consolidation has been up slightly through May 2018 as compared to May 2017 with 97 transactions announced through May 2018, but only 52 transactions with terms, compared to 93 through May 2017, and 59 transactions with terms. Median pricing in 2018 was substantially higher on a price to tangible book increase of 14.4% (median 1.84x), on a price to 8% tangible book increase of 16.1% (1.94x), on an increase of price to deposits of 4.9% (22.6%), and higher on a price to earnings basis with a 14.7% increase on LTM earnings (26.3x).

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 2.34x, and second highest on a price to deposits basis of 23.7%, price to LTM earnings of 28.1x, and price to tangible book of 195%. The West region had twelve transactions, ten transactions with pricing, and was the highest priced region on a tangible book basis of 2.11x, highest on a price to deposits basis of 24.6%, and second highest on price to 8% tangible book with a multiple of 2.30x. The deals in the West region were the most profitable with an LTM ROAA and ROAE of 0.77% and 7.39%, and was tied for the second best asset quality (NPAs/Assets 0.40%). The Southwest continued with strong pricing as the third highest priced on a price to tangible book basis of 1.88x and a price to 8% tangible book of 2.00x. The East – New England region remained the highest priced on a LTM earnings basis with a 34.2x multiple with seven transactions with pricing, but it was the second least profitable region (LTM ROAA 0.50%). The Midwest generally remained generally one of the lowest priced regions, although asset quality and profitability were not among the weakest, with 10 transactions with pricing for a price to tangible book multiple of 1.64x, a price to 8% tangible book of 1.94x and price to LTM earnings of 25.2X. The North Central region has 20 transactions, but only four with pricing. The region was the lowest priced with a price to book of 1.62x, price to 8% tangible book of 1.64x and price to deposits of 17.0%, although the region was the second most profitable with an ROAA of 0.69% and had the best asset quality (NPAs/Assets 0.38%).

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