Public bank stocks increased at a faster rate than the broader market in November as the Federal Open Market Committee (FOMC) announced it was open to an interest rate hike in December from the current 0%-0.25% rate. In prior months, the FOMC indicated that a rate increase would be considered after more labor market gains and when the committee is confident that inflation will move towards its long-term target. Minutes from the FOMC meeting showed that all but one member voted to leave the fed funds rate alone, leaving many questioning whether a rise in rates will actually happen in December. Further helping bank stocks were strong employment numbers as it was announced private sector employment increased 182,000 jobs in October and non-farm employment rose 271,000 jobs in October, well above estimates of 190,000, which brought unemployment down to 5.0%. Hurting the overall market was the announcement that October retail sales rose only 0.1%, below consensus estimates of 0.3%. M&A pricing was up year-to-date through November compared to year-to-date pricing through November 2014 and there were two more transactions in 2015 compared to 2014 (see chart below).
The SNL Bank Index gained 3.9% in November outperforming the S&P 500 which increased 0.1% as banks between $1 billion and $5 billion led the way. The SNL Bank Index for banks under $500 million was the only segment to post a decrease in November (for the second straight month), dropping 0.3% which matched its performance in October. The largest group (150), banks between $1 billion and $5 billion, posted the highest increase at 6.6% in November, followed by banks between $500 million and $1 billion which gained 3.6%, ahead of its 1.0% gain in October.
Over the past three months, the SNL Bank index increased 5.4% and slightly underperformed the broader market with the S&P 500 index increasing 5.5%. Banks with assets between $1 billion and $5 billion reported the highest growth at 12.0% while banks with assets between $500 million and $1 billion grew 5.7%, followed by banks less than $500 million which increased 5.6%.
Over the past 12 months, banks are now outperforming the broader markets with the SNL Bank Index improving 5.8% compared to the S&P 500 which lost gained just 0.6%. Banks between $1 billion and $5 billion gained the most at 19.8%, followed by banks under $500 million which grew 14.0%, while banks between $500 million and $1 billion grew 10.6%.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, tangible book pricing tightened to similar levels among the Midwest, Northeast and Southwest Regions leaving the West at the high end based on superior performance leaving the Southeast and Mid-Atlantic at the low end.
The Midwest reported tangible book pricing of 1.49x (the same at October 2015), the Northeast reported 1.50x (down 0.4% from October 2015) and the Southwest reported 1.51x (down 0.86% from October 2015) as its LTM net interest margin at 3.66% lagged the West and Southeast. The Western region maintained the highest tangible book pricing at 1.62x and price to earnings at 16.7x, both flat from October 2015, as the region reported the highest ROAA (0.99%) and net interest margin (3.85%) on a LTM basis among the regions. The Mid-Atlantic region reported the lowest tangible book price of 1.38x, up from 1.36x in October 2015 while the Southeast was slightly better at tangible book pricing of 1.46x (down 0.6% from October 2015). The Mid-Atlantic saw the largest increase in price to tangible book multiples (1.8%) since October 2015 to 1.38x. In fact, the Mid-Atlantic was the only region to show gains on a price to tangible book basis in November, although it remains at the bottom of the pricing spectrum.
On a median price to earnings basis, the West and Southeast reported the highest pricing at 16.7x and 16.8x LTM earnings, respectively, followed by the Southwest (15.7x) and Northeast (15.6x) with the Midwest and Mid-Atlantic at 14.6x and 15.2x LTM earnings, respectively, on the low end. The Southeast region showed the largest gain in since October, increasing 1.8%, while the Southwest was the only region to decline on price to earnings basis, down 4.6% from October 2015.
PRICING BY SIZE
Pricing continues to be proportional to asset size and earnings, however, the smallest banks, those less than $500 million, were the only group with price improvement since October 2015 on a price to tangible book increasing 7.2% to 1.11x. Banks between $500 million and $1 billion, dropped to the lowest price to tangible book multiple, dropping 0.3% in November to 1.08x. Banks between $5 billion and $10 billion maintained the highest price to tangible book at 1.97x, flat since October 2015. Banks over $10 billion also on the high end reported a price to tangible book multiple of 1.70x, although the group saw the largest decrease (3.2%) since October. Mid-sized banks, those between $1 billion and $5 billion, decreased 1.0% since October 2015 and were priced at 1.48x tangible book.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion once again reported the highest multiple of 17.7x, flat from October 2015, while the largest banks reported a median price to LTM earnings of 15.9x, down 0.5% from October 2015. In fact, the largest banks were the only ones to post a decrease in LTM price to earnings in November. Banks with less than $500 million were flat from October 2015 at 17x but have seen elevated price to earnings since June 2015 when they jumped from 12.7x earnings at March 2015 to 15.6x earnings at June 2015 as earnings remain low. Banks between $500 million and $1 billion reported the lowest pricing at 13.7x earnings but were the only group to post an increase (1.3%) from October 2015. From a performance perspective, banks with assets between $5 billion and $10 billion reported the highest ROAA of 1.00% and lowest NPAs/Assets of 0.81%, while banks between $1 billion to $5 billion posted the highest LTM net interest margins of 3.70%.
Mergers & Acquisitions By Region
Bank consolidation continued at essentially the same pace on a year-to-date basis through November 2015 with 243 transactions reported slightly outpacing the 241 announced transactions for the January through November 2014 time period. Approximately 53% of the transactions announced in 2015 reported pricing terms, while 58% of the transactions in 2014 reported terms. Median year-to-date pricing through November 2015 was up across the board, at a 5.3% improvement on tangible book (1.41x), 5.7% improvement on 8% tangible book (1.49x), 6.7% improvement on deposits (16.9%), and 2.9% improvement on LTM earnings (22.7x) compared to year-to-date pricing through November 2014. Yet again, the Southwest Region had the highest median price to tangible book multiple (1.65x) with the highest median ROAA (0.66%) and lowest median NPA levels (0.4%). The Midwest followed the Southwest Region on price to tangible book (1.47x) reporting the highest tangible equity levels of 10.4%. New England reported the highest price to LTM earnings (26.0x) but reported a median ROAA of 0.38% while the Southwest reported a price to LTM earnings of 20.8x while reporting the highest ROAA (0.66%) and strong asset quality (NPAs/Assets 0.4%). While banks selling in the North Central reported strong tangible equity at 10.3% resulting in lower price to tangible book multiples (1.15x), the North Central reported LTM earnings of 23.2x and had a median ROAA of 0.57% with strong asset quality (NPAs/Assets 0.6%). The Midwest reported the lowest LTM earnings multiple at 17.5x while also reporting the highest median NPAs/Assets level at 1.7%.
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a regional median LTM ROAA range of 0.31% – 0.66% compared to a range of 0.82% – 0.99% for publicly traded institutions.
More information regarding nationwide M&A activity can be found here.