In November 2017, bank stocks ended the month up 2.8% after being down nearly 4% mid-month. Impacting volatility during November was the appointment of new the Federal Reserve Chairman, Jerome Powell, which led the market to gains early in the month, and was followed by downward pressure resulting from the uncertainty of the GOP to pass tax reform as well as confusion regarding leadership at Consumer Financial Protection Bureau.
The month began with President Trump’s nomination of Federal Reserve Governor Jerome Powell to be the next Federal Reserve Chairman. It is anticipated that Powell will likely preserve the policies of the current chair Janet Yellen. The market still anticipates the announcement of the third increase to the federal funds target rate in 2017 as the outcome of the December Federal Open Market Committee (“FOMC”) meeting. With a change of regime at the Federal Reserve, New York Federal Reserve President William Dudley does not believe that there will be a radical change in approach going forward to gradually raising rates and reducing the Fed’s $4.5 trillion balance sheet. Complications on GOP tax reform pushed bank stocks down in the month with worry that different approaches taken by the U.S. House of Representatives and Senate would lessen, stall or kill the tax reform efforts. The U.S House of Representatives GOP passed their version of a tax reform bill mid-month and the Senate believed that the GOP would have the votes to pass their version. On November 15th the director of the Consumer Financial Protection Bureau (“CFPB”), Richard Cordray announced his plan to resign from his post at the end of the month and officially resigned November 24th.
Regulatory relief for community bankers remains a hot topic in the month as current Federal Reserve Chair, Janet Yellen mentioned in her last scheduled testimony before Congress that she supported a bipartisan bill proposed earlier in the month that would reduce regulations for smaller banks. The bill would exempt banks with less than $10 billion in total assets from complying with the Volcker rule. Yellen also criticized a portion of the bill that would increase the asset threshold for enhanced prudential standards from $50 billion to $250 billion.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 261,000 in October. The increase undershot analyst expectations of an increase of 325,000 jobs in the month but the unemployment rate declined to 4.1% in October. U.S. Average Hourly Earnings fell slightly in the month of October but the year-over-year pace of growth remained at 2.4%.
Bank M&A pricing was up significantly year-to-date through November compared to the same period in 2016 on about the same number of transactions (see chart below).
The SNL Bank Index increased 2.8% in November which was in line with the S&P 500 which gained 2.8% during the month as well, while banks below $500 million increased the most at 3.7%, banks between $500 million and $1 billion posted an increase of 2.0%, and banks between $1 billion and $5 billion gained 3.0% during the month.
Over the three month period ending November 2017, the SNL Bank Index gained 12.9% while the S&P 500 increased 7.1%. Over the prior twelve months, the SNL Bank Index performed in line with the overall market, as it increased 20.1% while the S&P 500 increased 20.4%
REGIONAL PRICING HIGHLIGHTS
All regions reported higher price to tangible book multiples with the exception of the Northeast. The Southwest region maintained its leading position reporting the highest price to tangible book at 204.6%. The Southeast region reported the second highest pricing by region of 199.3% after an improvement of 4.2% in the month. The West and Midwest both reported a median price to tangible book of 191.7% followed by the Northeast at 191.6% and was previously the second highest priced region. The Mid-Atlantic was the lowest priced region with a median at 181.8% but saw the largest increase in the month growing 4.8%.
Strong pricing among the public banks in the Southwest region was supported by strong earnings (ROAA 1.00%) and Net Interest Margin (3.52%). The Southeast pricing increased as the Net Interest Margin improved to be the second strongest region at 3.64%. Loan demand remained the strongest in the Northeast region (Loan/Deposits of 95.6%) while the Net Interest Margin remained the weakest at 3.25%, but the decrease in pricing was driven by the decrease in asset quality (NPAs/Assets of 0.71%) from the prior month (0.54%). The West continued to lead on earnings (ROAA of 1.08%), net interest margin (3.75%), and reported the strongest asset quality (NPAs/Assets of 0.64%). The Mid-Atlantic remained the lowest priced region on the weakest earnings (ROAA 0.88%) and the second weakest Net Interest Margin behind the Northeast (3.44%) but reported Loan demand remained strong with Loans/Deposits of 94.3%.
On a median price to earnings basis, the Northeast region was the only region to decline in November dropping the region to the lowest price to earnings basis (18.4x, tied with the Mid—Atlantic which grew 2.2% during November). Pricing multiples for all the regions maintained price to LTM earnings between 18.4x and 21.1x. The Southeast region reported the highest increase on a price to earnings basis (4.8%) on an increase to Net Interest Margin. The Midwest reported price to earnings at 18.6x up 3.5% on an increase to earnings (ROAA of 1.02%), increased loan demand (Loans/Deposits 92.6%), and an increase in Net Interest margin to 3.61%.
PRICING BY SIZE
Size matters in 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 general, size affords higher profitability which has a direct impact on pricing multiples. During November, the three groups with total assets over $1 billion maintained their median tangible book pricing averaging 215% while the two smallest group medians increased to average 146% price on tangible. On a price to LTM earnings basis, the smallest banks reported the highest price to earnings multiple but reported much lower earnings (ROAA 0.66%). The three groups with assets over $1 billion maintaining an average of 19.5x but reported median ROAAS between 0.95% and 1.08%.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.70%) and lower asset quality (0.98% average of median NPAs/Assets) than institutions with assets over $1 billion (average median LTM ROAA 1.02% and NPAs/Assets 0.65%).
Mergers & Acquisitions by Region
Bank consolidation maintained a consistent but slightly slower pace with 209 transactions announced year-to-date 2017 compared to 215 through November 2016. However, median year-to-date pricing through November 2017 was substantially higher at a 19.2% increase on tangible book (median 1.65x), 18.5% increase on price to 8% tangible book (1.75x), 10.8% increase on LTM earnings (21.5x), and 22.1% increase on deposits (20.4%) compared to transactions announced through November 2016. Higher prices in 2017 for merger and acquisitions are the direct result of higher public bank stock prices.
The Southwest region reported the highest price to tangible book multiple at 1.94x (13 deals with terms) on deals with the highest median earnings (LTM ROAA 0.88%) and best asset quality (NPAs/Assets 0.5%). The West followed with a median price to tangible book multiple at 1.87x (21 deals with terms) followed by the South at 1.66x which also reported the most consolidation with a total of 60 deals announced (42 announced with terms). The lowest priced region, the East – New England, reported a tangible book pricing multiple of 1.33x (23 deals with terms) likely due to having the lowest LTM ROAA performance of the targets at 0.33% and the highest NPAs/Assets at 1.3%.
More information regarding nationwide M&A activity can be found here.