In the month of November the SNL Bank Index outperformed the S&P 500, increasing 2.6% while the S&P 500 increased 1.8%. Bank stocks and the broader market traded around the mid-term elections, the holiday shopping season, and new Federal Reserve guidance.
Both indexes showed strong performance during the beginning of the month mostly around expectations and reality of the mid-term election results. As many investors expected, Democrats took the House, so a divided government is set to return, which will limit policy-related volatility going forward. However, for the month of November, volatility continued as the market fell sharply mid-month, only to rebound at the end of the month. Weaknesses in big tech stocks and uncertainty around holiday retailer performance led the mid-month decline, while the subsequent increase was catalyzed by the Fed stating rates are close to neutral, an improvement from their message in early October. Bank stocks generally followed the S&P trend, however stayed buoyed above the S&P throughout the month.
In other related news, concerns over CECL have resulted in a scheduled hearing with the House Financial Institutions and Consumer Credit Subcommittee on December 11, 2018. Banks have repeatedly criticized the current version of the accounting standard, which is scheduled to take effect in less than 13 months and overhauls how they record losses on their assets. They have asked regulators to delay the implementation of CECL and said the standard would increase volatility in regulatory capital.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 155,000 in November, above the consensus estimates of 200,000. The unemployment rate was unchanged at 3.7% while the average hourly earnings for employees increased by six cents, or 0.2% month over month. In October, U.S. existing-home sales rose 1.4% from September. Sales are 5.1% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $255,400, up 3.8% from the prior year.
Bank M&A pricing was up significantly in November 2018 compared to November 2017 on a higher number of transactions (see chart below).
The SNL Bank Index showed an overall slight increase through the month increasing 2.6%, outperforming the S&P 500 which was up 1.8% during the month. Big banks buoyed the SNL Bank Index performance as banks between $1 billion and $5 billion increased 1.2%, while banks between $500 million and $1 billion decreased 2.6% in the month, and banks below $500 million dropped 5.0%.
Over the three month period ending November 2018, the SNL Bank Index decreased 7.4% while the S&P 500 fell 4.9%. Over the prior twelve months, the SNL Bank Index decreased 2.9% and the S&P 500 increased 4.3%. Banks between $500 million and $1 billion increased by 3.4%, while banks with less than $500 million decreased 2.5%, and banks with between $1 billion and $5 billion decreased 6.9%.
REGIONAL PRICING HIGHLIGHTS
In November, pricing was mixed across all regions. The Southwest experienced a modest increase in November of 1.5% and regained its spot as highest priced region on a price to tangible book multiple of 178.1%. The West fell to the third highest priced region at a 171.6% price to tangible book after having the largest decrease of 4.5% in the month. The Southeast and Mid-Atlantic regions increased 2.8% and 1.3% in November to multiples of 165.8% and 155.9%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest region logged a slight increase in pricing of 0.9% in the month to a price to tangible book of 173.6%, and has become the second highest priced region. The Northeast decreased 1.3% in November, and became the third lowest priced region at a price to tangible book multiple of 171.2%.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.13%), Net Interest Margin (3.71%), and asset quality (NPAs/Assets of 0.61%). The Southeast was the second lowest priced region, and had the second weakest loan demand (Loan/Deposits of 91.5%), the weakest asset quality (NPAs/Assets of 0.68%) and middle of the road on profitability (ROAA of 1.04%) and NIM (3.66%). The Northeast region’s asset quality is tied for worst in the group (NPAs/Assets 0.68%) but kept a strong loan demand (Loan/Deposits of 96.2%). The Midwest region was the second highest priced region and had the strongest profitability with an ROAA of 1.14% and a strong Net Interest Margin of 3.70%. The West was the third most profitable region with an ROAA of 1.07% and had the best Net Interest Margin of 3.89%, the strongest asset quality (NPAs/Assets 0.45%), but weak loan demand with Loans/Deposits of 88.5%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.92%, the third weakest asset quality (NPAs/Assets 0.64%), but strong loan demand with Loans/Deposits of 95.5%.
On a median price to earnings basis, pricing was increased across the group. The Northeast region saw the largest increase in pricing of 6.8%, and is now the third highest priced region with a price to earnings multiple of 16.6x. The Southeast region remained the highest priced with a price to earnings multiple of 17.2x with the second largest increase, 5.2% in November. The Southwest region saw a price increase of 4.4% in November to a price to earnings multiple of 17.1x, remaining as the second highest priced of the regions. The Mid-Atlantic increased 2.7% in November with a price to earnings multiple of 16.1x. The lowest price increase came in the West at 2.1%, sharing the second lowest priced region with a 16.1x price to earnings multiple, while the Midwest experienced an increase of 2.4% to a 15.0x price to earnings multiple, remaining the 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 November, that differential was exactly 50.3% higher for the peers with assets greater than $1 billion on a price to tangible book basis. During November, pricing for the three groups with total assets over $1 billion increased by 1.9% on a median price to tangible book basis with a price to tangible book median of 192.3%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experienced an increase in pricing of 5.2% to a 208.0% price to tangible book multiple. The group with assets greater than $10 billion saw an increase in pricing of 1.9% to a median price to tangible book of 192.3%, but remained the second highest priced group. The group with assets from $1 billion to $5 billion saw an increase in pricing of 3.2% to a price to tangible book multiple of 163.8%. 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 134.4% and 121.4%, respectively, with pricing for the $500 million to $1 billion group decreasing 8.1% while the group less than $500 million decreased 5.8%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw an increase in pricing of 1.9%. The group with assets between $500 million and $1 billion experienced the only decrease in its price to earnings multiple, down 8.0% to 16.9x and is the second highest priced group. The two groups with assets between $1 billion and $5 billion and between $5 billion and $10 billion saw increases in pricing of 1.4% and 4.5% to price to earnings multiples of 16.1x for both. The highest priced was the group with less than $500 million, increasing 26.3% to a 23.2x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.69%) and a slightly lower loan demand (average Loans/Deposits of 92.27%) than institutions with assets over $1 billion (average of median LTM ROAA 1.10% and Loans/Deposits 92.32%).
Mergers & Acquisitions by Region
Bank consolidation continued up through November 2018 as compared to November 2017 with 229 transactions announced through November 2018 (116 transactions with terms), compared to 209 through November 2017 (126 transactions with terms). November 2018 was another busy month on the Mergers and Acquisitions front with 22 deals announced. Median pricing in 2018 was substantially higher than 2017 on a price to tangible book increase of 6.8% (median 1.76x), a price to 8% tangible book increase of 8.4% (1.90x), an increase of price to deposits of 4.2% (21.2%), and a price to earnings basis with a 14.1% increase on LTM earnings (24.5x).
The South region continues to have the highest number of transactions and number of transactions with terms with 50 deals through November of which 32 reported terms. Transactions in the South reported the third highest price to tangible book with a multiple of 182%, the second highest price to 8% tangible book (198%), the second highest price to earnings (25.8x) and the second highest price to deposits at 23.2%. The West region has reported 25 deals in 2018 with 20 of them reporting terms, and reported the highest pricing on a price to tangible book basis, price to 8% tangible book, and price to deposits (204%, 230%, and 23.7%, respectively). The high pricing in the West is supported by the strongest asset quality deals (NPAs/Assets of 0.40%), the second highest level of profitability (ROAA 0.78%) and the largest median total assets. The Midwest and North Central regions each had over 40 transactions in 2018 with the Midwest having 48 (20 with terms), and the North Central having 44 (only seven with terms). Both regions remained in the bottom half of pricing on a price to tangible book (Midwest at 164% and North Central at 182%). The North Central region was the lowest priced region across all multiples except for price to tangible book, finishing second lowest. Although it was the third most profitable and had the third best asset quality, it was the smallest median total assets. The East – New England and the Southwest each eclipsed 25 deals through November (29 and 33, respectively). The Southwest rose to the second highest priced on a price to tangible book basis of 1.84% and mid-level on a price to 8% tangible book basis of 1.89%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.1x multiple with 22 transactions with pricing, but it was the least profitable region (LTM ROAA 0.51%).
More information regarding nationwide M&A activity can be found here.