Public bank stocks increased at a slower rate than the broader market as the Federal Open Market Committee (FOMC) announced it was holding interest rates steady at 0%-0.25%. The FOMC indicated that a rate hike will be considered after more labor market gains and when the committee is confident that inflation will move towards its long-term target. The broader market surged on optimism about China and the global economy as the Chinese central bank announced it would cut interest rates and lower the amount of reserves the country’s banks are required to hold. The moves are intended to jump-start the slowing economy in China which has devalued the yuan and seen its stock market crash over the summer. Further helping bank stocks were stable third quarter earnings reports, as a strong majority of banks reported they beat prior year EPS numbers and analyst estimates. M&A pricing was up year-to-date through October compared to year-to-date pricing through October 2014 although there were three less transactions in 2015 compared to 2014 (see chart below).
The SNL Bank Index gained 5.2% in October underperforming the S&P 500 which increased 8.3% as banks under $500 million brought down the total index. The SNL Bank Index for banks under $500 million was the only segment to post a decrease in October, dropping 0.3% after gaining 6.3% in September. The largest group (148), banks between $1 billion and $5 billion, posted the highest increase at 3.3% in October, followed by banks between $500 million and $1 billion which gained 1.0%, matching its performance in September.
Over the past three months, the SNL Bank index decreased 5.8% and underperformed the broader market with the S&P 500 index dropping just 1.2%. Banks with assets under $500 million reported the highest growth at 5.0% while banks with assets between $1 billion and $5 billion grew 2.4%, followed by banks between $500 million and $1 billion which edged up 1.2%.
Over the past 12 months, banks are now underperforming the broader markets with the SNL Bank Index improving 2.5% compared to the S&P 500 which lost gained 3.0%. Banks under $500 million gained the most at 17.3%, followed by banks between $1 billion and $5 billion which grew 10.0%, while banks between $500 million and $1 billion grew 7.3%.
REGIONAL PRICING HIGHLIGHTS
From a regional perspective, the Western and Southwest regions continue to maintain the highest price to tangible book multiples, as the West reported a median price to tangible book multiple of 1.62x in October, up 12.1% from year end 2014 and 3.1% since September 2015. While the Southwest region had the second highest price to tangible book multiple of 1.53x, it was the only region that has decreased from year end 2014 and September 2015, down 8.4% and 6.0%, respectively. The Southwest has also been surpassed on LTM ROAA by the Midwest (0.93% vs. 0.94%) and on LTM net interest margins (3.69% vs. 3.70%) by the Southeast as the energy sector cooled in the Southwest. The West remains the highest performing region on both an ROAA and net interest margin basis, at 0.99% and 3.84%, respectively as of October 31, 2015. The Southeast saw the largest increase in price to tangible book multiples (15.8%) since year-end 2014 and as of September 2015 (4.9%) as their economy continues improve. The Midwest increased 12.9% to a tangible book multiple of 1.49x since year end 2014 while the Mid-Atlantic at 1.36x tangible book improved 6.8% from year-end 2014 but was at the bottom of the pricing spectrum.
On a median price to earnings basis, pricing ranged from 14.6x to 16.7x LTM earnings with the Southeast, Southwest, and West at the high end averaging 16.6x while the Mid-Atlantic, Midwest, and Northeast averaged 15.1x earnings. The West region showed the largest gain in since year end 2014, increasing 11.6%, while the Southeast region posted the largest increase since September 2015 at 2.8%. The Southwest region declined 5.6% from year-end 2014 and 5.9% from September 2015.
PRICING BY SIZE
While pricing continues to be proportional to asset size, banks between $5 billion and $10 billion saw the largest increase in price to tangible book since both year end 2014 and September 2015, increasing 15.8% and 3.6%, respectively, and remain the highest priced group at 1.97x at October 31, 2015. Banks over $10 billion had the next largest price to tangible book multiple of 1.76x, which was up 8.9% from year end 2014 but down 2.9% from September 2015. Banks between $500 million and $1 billion increased 5.0% from year end 2014 and 2.3% from September 2015 to 1.08x tangible book, while banks between $1 billion and $5 billion increased 12.0% from year end 2014 and 3.3% from September 2015 to 1.49x. The smallest group, banks less than $500 million, decreased 0.7% from year end 2014 and 9.2% from September 2015 to 1.04x, remaining the lowest priced group by size.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion reported the highest multiple of 17.7x, up 11.0% from year end 2014 and 1.7% from September 2015, while the largest banks reported a median price to LTM earnings of 16.0x, up 3.0% from year end 2014 but down 5.2% from September 2015. Banks with less than $500 million increased 6.2% from year end 2014 and 5.0% from September 2015 to 17.0x at October 2015. Banks between $500 million and $1 billion showed the largest increase from September 2015, up 7.5% to 13.5x. 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 $500 million and $1 billion and $1 billion to $5 billion each posted the highest LTM net interest margins of 3.69%.
Mergers & Acquisitions By Region
Bank consolidation continued at essentially the same pace on a year-to-date basis through October 2015 with 216 transactions reported slightly trailing the 219 announced transactions for the January through October 2014 time period. Approximately 52% of the transactions announced in 2015 reported pricing terms, while 57% of the transactions in 2014 reported terms. Median year-to-date pricing through October 2015 was up 5.1% on tangible book (1.41x), 6.0% on 8% tangible book (1.49x), and 7.7% deposits (16.9%) but was flat on LTM earnings (22.5x) compared to year-to-date pricing through October 2014. Yet again, the Southwest Region had the highest price to tangible book multiple (1.65x) with the next to highest ROAA (0.66%) and lowest NPA levels (0.4%). The Midwest followed the Southwest Region on price to tangible book (1.52x) reporting strong tangible equity levels. New England reported the highest price to LTM earnings (24.5x) but reported an ROAA of 0.41% 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 the North Central reported strong tangible equity at 10.4% resulting in lower price to tangible book multiples (1.1x), the North Central reported LTM earnings of 21.1x with a median ROAA of 0.54% and strong asset quality (NPAs/Assets 0.5%).
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a regional median LTM ROAA range of 0.38% – 0.66% compared to a range of 0.82% – 0.99% for publicly traded institutions.
Compared to publicly traded banks, the 2015 M&A transactions were lower performing financial institutions with a median LTM ROAA of 0.52%, LTM ROAE of 5.33% and NPAs/Assets of 1.4%.
More information regarding nationwide M&A activity can be found here.