Chris Noon

In the month of May the S&P 500 outperformed the SNL Bank Index, with a decrease of 6.6% compared to 9.9% for the SNL Bank Index. Bank stocks and the broader market traded mostly around the overarching trade and tariff conflict with China that escalated throughout the month. Eyes will be on the Fed to see if a possible rate cute will occur.

Both indexes trended negative through the entirety of the month. The trade conflict with China flared up in the beginning of the month as the U.S. announced they would proceed with higher tariffs after no official agreement was reached. Tensions were further escalated when the U.S. decided to ban exports to China’s largest telecom operator, Huawei. This could signal a less-likely near term deal. All of this could spur speculation of an impending rate cut by the Fed if the economic situation continues negative.

In other related news, the upcoming new CECL accounting standard, which many in the industry view as a potential hindrance to earnings and lending ability, faced a potential bill that would delay its implementation. However, as of the end of May, it seems the bill may not make passage if partisan politics have any influence. Most in the industry still expect the January 1, 2020 implementation date to stay in effect.

In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by just 75,000 in May, missing the consensus estimates of 180,000. The unemployment remained at a 50-year low of 3.6% while the average hourly earnings for employees increased 3.1% year over year. In April, U.S. existing-home sales fell 0.4% from March. Sales are 4.4% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $267,300, up 3.6% from the prior year.

Bank M&A pricing was slightly down in May 2019 compared to May 2018 on the same number of transactions (see chart below).

The SNL Bank Index showed an overall decrease through the month dropping 9.9%, while the S&P 500 decreased by 6.6% during the month. The SNL Bank Index was down in all size groups as banks between $1 billion and $5 billion decreased 4.9%, banks between $500 million and $1 billion decreased 3.4%, and banks below $500 million dropped 5.8%.

Over the three month period ending May 2019, the SNL Bank Index decreased 6.9% while the S&P 500 lost 1.2%. Over the prior twelve months, the SNL Bank Index decreased 11.9% while the S&P 500 increased 1.7%. Banks between $500 million and $1 billion decreased 7.3%, while banks with assets less than $500 million decreased 8.8%, and banks between $1 billion and $5 billion decreased 16.7%.

REGIONAL PRICING HIGHLIGHTS

In May, pricing was down across all regions. The Southwest experienced the largest decrease since April of 9.2%, yet remained the highest priced region on a price to tangible book multiple of 160.0%. The West dropped to the third highest priced region at a 152.4% price to tangible book after having decreased 8.6% in the month. The Southeast and Mid-Atlantic regions decreased 8.1% and 5.0% in May to multiples of 146.3% and 139.6%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest and Northeast decreased 7.2% and 4.7%, respectively, to a price to tangible book of 146.4% and 156.6%, respectively. The Northeast remained the second highest priced region, and the Midwest region sits as the third lowest priced region.

Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.27%), net interest margin (3.78%), and asset quality (NPAs/Assets of 0.49%). The Southeast was the second lowest priced region, and had the second weakest loan demand (Loan/Deposits of 89.2%), and middle of the road asset quality (NPAs/Assets of 0.63%), profitability (ROAA of 1.19%) and NIM (3.67%). The Northeast region’s asset quality remained the group’s worst (NPAs/Assets of 0.71%) and the region fell to the second highest loan demand (Loan/Deposits of 94.8%). The Midwest region remained at the third strongest profitability with an ROAA of 1.23% and a third highest Net Interest Margin of 3.73%. The West became the most profitable region with an ROAA of 1.28% and had the best Net Interest Margin of 4.00%, the strongest asset quality (NPAs/Assets 0.38%), and improving loan demand with Loans/Deposits of 89.9%. The lowest priced region, the Mid-Atlantic, had the second lowest profitability with an ROAA of 1.10%, the third weakest asset quality (NPAs/Assets of 0.62%), but strong loan demand with Loans/Deposits of 95.8%.

On a median price to earnings basis, pricing decreased across each of the regions. The Northeast region decreased 6.0%, and is now the third lowest priced region with a price to earnings multiple of 12.2x. The Southeast region remained the third highest priced region with a price to earnings multiple of 12.4x after a decrease of 9.3% in May. The Southwest region saw a price decrease of 8.3% in May to a price to earnings multiple of 13.4x, maintaining its position as the highest priced of the regions. The Mid-Atlantic decreased by 5.8% in May with a price to earnings multiple of 11.9x (lowest in the group). The West decreased 2.7%, to a 12.7x price to earnings multiple, while the Midwest experienced a decrease of 5.3% to a 12.0x price to earnings multiple, becoming the second lowest 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 May, that differential was 20.4% higher for the peers with assets greater than $1 billion on a price to tangible book basis. The highest priced asset class is now the group with assets between $5 billion and $10 billion, which experienced an decrease in pricing of 7.5% to a 162.2% price to tangible book multiple, ahead of the 160.0% multiple of the banks greater than $10 billion which dropped 11.6%. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 3.7% to a price to tangible book multiple of 138.8%. 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 128.0% and 137.7%, respectively, with pricing for the $500 million to $1 billion group decreasing 0.2% while the group less than $500 million increased 1.9%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw the largest decrease in pricing of 9.8%. The group with assets between $500 million and $1 billion saw a decrease in its price to earnings multiple, down 0.2% to 13.1x and is tied for the second highest priced group. The group with assets between $1 billion and $5 billion saw a decrease of 4.2% to a price to earnings multiple of 12.5x, while the group between $5 billion and $10 billion saw a decrease in pricing of 4.8% to a price earnings multiple of 13.1x. The highest priced was the group with less than $500 million, decreasing 7.3% to a 13.4x price to earnings multiple.

Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.94%) and loan demand (average Loans/Deposits of 90.8%) than institutions with assets over $1 billion (average of median LTM ROAA of 1.22% and Loans/Deposits of 92.3%).

Mergers & Acquisitions by Region

Bank consolidation was down through May 2019 as compared to May 2018 with 81 transactions announced through May 2019 (41 transactions with terms) compared to 97 transactions (52 with terms) through May 2018. Median pricing through 2019 was lower than 2018 on a price to tangible book decrease of 13.1% (median 1.60x), a price to 8% tangible book decrease of 8.3% (1.77x), a decrease of price to deposits of 17.1% (18.8%), and a price to earnings basis with a 23.8% decrease on LTM earnings (20.0x).

TThe South region continues to have the highest number of transactions and number of transactions with terms with 20 deals through May of which 12 reported terms. Transactions in the South reported the third lowest price to tangible book of the group with a multiple of 160%, the lowest price to 8% tangible book (161%), and lowest fourth lowest price to earnings (19.5x) and the third lowest price to deposits at 18.1%. The West region has reported 8 deals in 2019 with 5 of them reporting terms, and reported the highest pricing on a price to tangible book basis, highest price to 8% tangible book, and highest price to deposits (216%, 231%, and 30.6%, respectively). The Midwest and North Central had 17 and 12 transactions, respectively, in 2019 (7 and 4 with terms, respectively), with a 150% and 182% price to tangible book, respectively. The East – New England region logged 13 transactions (8 with terms) with a price to tangible book of 175% and price to deposits of 17.4%. The Southwest had 11 deals through May, and 5 with deal terms.

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