In November 2016, stock markets traded at record-high levels after Donald Trump won the presidential election. The win for the business-friendly President-elect sent bank stocks soaring as the SNL Bank Index increased 17.3% in November. In his victory speech, Trump cited ambitions to invest in infrastructure and bring economic growth. The prospects of a future under President Trump excited markets as his administration continues to promise across-the-board deregulation. Shortly after winning the nomination, his team launched a website in which he outlined plans for a temporary moratorium on all new regulation and plans to dismantle Dodd-Frank. According to SNL Financial, one analyst said of financial companies: “they’re getting a trifecta of benefits: less regulation, a potential corporate tax cut, and a higher and steeper yield curve. This helps financials in a massive way.” While some analysts believe the run-up in stock prices is an overreaction, markets are now less uncertain than they were at the beginning of the month when investors didn’t know which path the country would take. It is clear to see that the election results have increased business and investor confidence.
In economic news, the U.S. Labor Department announced that total nonfarm employment added 161,000 nonfarm payroll jobs in October as the unemployment rate dropped to 4.9% after increasing to 5.0% in September. The September increase in unemployment was the first for the prior three months. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced sales of new single-family houses in October were at a seasonally adjusted annual rate of 563,000, which is 1.9% below the revised September rate of 574,000, but 17.8% above the October 2015 estimate of 478,000. According to the Federal Housing Finance Agency’s house price index, U.S. home prices rose 1.5% in the third quarter, up 6.1% from the third quarter of 2015.
In other news, minutes from the Federal Reserve’s November Federal Open Market Committee meeting showed some members seeing a case to raise the federal funds rate “relatively soon,” as early as the next meeting set to take place December 13th or 14th. The minutes showed “most participants” would feel it appropriate to raise the benchmark rate in the near term as long as economic data continues to point towards “continued progress.”
Bank M&A pricing was down year-to-date through November compared to year-to-date pricing through November 2015 on lower volume (see chart below).
The SNL Bank Index increased 17.3% in November, and outperformed the S&P 500 which increased 3.4%, while banks between $1 billion and $5 billion gained 17.0%, banks between $500 million and $1 billion increased 11.0%, and banks below $500 million posted an increase of 7.6% during the month.
Over the three month period ending November 2016, the SNL Bank Index increased 17.7% while the S&P 500 increased 1.3%. The trend remained over the prior twelve months as the SNL Bank Index increased 12.7% while the S&P 500 increased 5.7%.
REGIONAL PRICING HIGHLIGHTS
The Midwest region saw the largest increase in median price to tangible book (19.5%) in November while the Northeast remained the highest median pricing among all regions. A 5.5% increase in oil prices in November supported a pricing jump of 15.8% in the Southwest region, which is heavily tied to the energy sector. This is the fourth straight month of an increase in bank pricing in the Southwest. While all regions were up double digits in November, the Southeast region increased the least at a median price to tangible book of 12.3% in November, while the West, typically a strong performer, saw the second highest increase in median price to tangible book, gaining 18.0%. The West had decreased in price the previous two months as Wells Fargo is heavily weighted in the Western bank index.
At 1.93x tangible book, the Northeast region claimed the highest median price among all regions for the third straight month as the region reported strong loan demand reflected in the highest loan to deposit ratio (96.5%) and strong median NPAs/Assets (0.73% tied with the West). The Mid-Atlantic region reported the lowest median tangible book price of any region at 1.61x, but was up 13.9% from October 2016, while median pricing in the Midwest and West gained the most, 19.5% to 1.77x book and 18.0% to 1.78x book, respectively. The Southeast and Southwest reported median tangible book pricing of 1.75x and 1.79x (up 12.3% and 15.8%, respectively from October 2016).
On a median price to earnings basis, the Southwest reported the highest pricing for the fourth straight month at 20.1x LTM earnings while the Southeast followed closely reporting a 19.7x LTM earnings, followed by the Northeast (18.9x), Mid-Atlantic (18.6x) and West (18.1x) with the Midwest at a median 17.6x LTM earnings on the low end. The Southeast reported the largest increase on a price to earnings basis in November (up 19.4%), as each region showed at least a 15% increase in median price to LTM earnings since October.
PRICING BY SIZE
The disparity of pricing based on size grew during November as the three largest groups saw median tangible book pricing multiples grow an average 18.6% to an average price to tangible book multiple of 2.06x while the two smallest groups grew an average of 7% to an average price to book multiple of 1.17x multiple. The banks between $5 billion and $10 billion reported a median price of 2.47x tangible book (up 21.5% from October 2016), remaining the highest priced group, followed by banks greater than $10 billion at a median of 1.99x (up 16.2% from October 2016). The smallest banks, those below $500 million, were up 5.6% in November to a median of 1.14x, but are now the lowest priced group as banks between $500 million and $1 billion increased 8.5% during the month of November to a median of 1.19x. Mid-sized banks, those between $1 billion and $5 billion, increased 18.0% since October 2016 and were priced at a median 1.72x tangible book, essentially midway between the smallest and largest public institutions.
On a median price to LTM earnings basis, banks with assets above $10 billion were up the highest of any group at 20.6% in November to a median of 19.4x. The eight Banks with assets below $500 million were the only group to decrease on a price to earnings basis during November (8.4%) to 17.4x although they maintained the highest median LTM net interest margin of 3.69%. Banks with assets between $5 billion and $10 billion reported the highest earnings multiple at a median of 20.5x, up 17.7% since October 2016 on the highest median ROAA (1.07%) and best asset quality (NPAs/Assets of 0.58%). The largest banks reported a median price to LTM earnings of 19.4x, and reported the second highest median ROAA (0.96%). Banks between $500 million and $1 billion reported the lowest pricing at a median of 15.9x earnings and reported the lowest ROAA (0.81%) and asset quality (NPAs/Assets of 1.30%) while maintaining the highest median tangible equity to tangible assets (9.59%).
Mergers & Acquisitions by Region
Bank consolidation continued at a slightly slower pace on a year-to-date basis through November 2016 with 215 transactions compared to 243 reported through November 2015. The gap widened in November 2016 as 27 transactions were announced in November 2015 compared to 23 in November 2016. Approximately 55% of the transactions announced year-to-date through November 2016 reported pricing terms, while 53% of the transactions through November 2015 reported terms. Median year-to-date pricing through November 2016 remained down across the board at a 1.9% decrease on tangible book (1.38x), 0.6% decrease on 8% tangible book (1.48x), 14.2% decrease on LTM earnings (19.4x), and 1.4% decrease on deposits (16.7%) compared to year-to-date pricing through November 2015. Year-to-date through November, only five transactions were reported in the Southwest Region with pricing. Prior to October, the Southwest Region reported the lowest median price to tangible book multiple. However, the fourth and fifth transactions of the year reported with pricing in the region in November had an average price to tangible book multiple of 1.86x, bringing the median to 1.57x for the region, the highest of any region, as the targets had the highest median tangible equity to assets (11.4%) and highest median return on average assets (0.71%). The North Central region reported the lowest pricing multiples on the seven transactions which disclosed terms and reported a median price to tangible book of 1.31x and median price to LTM earnings of 12.9x. The Midwest reported the most transactions at 57 year-to-date, 34 with terms announced at a median price to tangible book of 1.37x and price to LTM earnings of 18.2x. The South region also reported 34 transactions with terms (out of a total of 46 year-to-date) with a median price to tangible book of 1.42x and price to LTM earnings of 19.5x.
More information regarding nationwide M&A activity can be found here.