In the month of October the SNL Bank Index outperformed the S&P 500 with the SNL Bank Index decreasing 5.4% while the S&P 500 decreased 6.9%. Bank stocks and the broader market traded around Italy’s deficit plan, Federal Reserve commentary, third quarter earnings, and the impending mid-term elections.
Both indexes showed flat performance during the beginning of the month on a few headlines centered on the announcement of Italy’s unpopular deficit plan as well as commentary from the Fed suggesting continued future rate increases until a “neutral economy”. There was also news that the U.S. and Canada reached agreement on a NAFTA replacement, meaning the three North American countries will now submit the proposal to their respective legislatures for approval. Third quarter earnings season had mixed results with big technology companies and banks reporting modest to unimpressive results. Toward the end of the month, with mid-term elections on the horizon, volatility continued with a slight uptick to finish a sluggish month.
In other related news, the Federal Reserve is proposing a major overhaul of regulatory requirements for all but the largest U.S. banks, including a plan to eliminate the liquidity coverage ratio for some regional banks and ease it for others. The plan, which Fed officials released ahead of a public meeting, would set up four categories of banks. It shifts away from placing banks into categories largely based on their size and takes into account other measures of a bank’s systemic risk, such as their nonbank assets, international activity or off-balance sheet exposures.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 250,000 in October, above the consensus estimates of 200,000. The unemployment rate was unchanged at 3.7% while the average hourly earnings for employees increased by five cents, or 0.2% month over month. In September, U.S. existing-home sales fell 3.4% from August. Sales are 4.1% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $258,100, up 4.2% from the prior year.
Bank M&A pricing was up significantly in October 2018 compared to October 2017 on a higher number of transactions (see chart below).
The SNL Bank Index showed an overall decline through the month reaching -10.3%, but a positive uptick during the last week resulted in the index being down 5.4% at month end, outperforming the S&P 500 which was down 6.9% during the month. Driving the SNL Bank Index decline were banks between $1 billion and $5 billion decreasing 7.5%, banks between $500 million and $1 billion decreasing 5.4% in the month, and banks below $500 million decreasing 2.6%.
Over the three month period ending October 2018, the SNL Bank Index decreased 8.9% while the S&P 500 fell 3.7%. Over the prior twelve months, the SNL Bank Index decreased 2.6% and the S&P 500 increased 5.3%. Banks between $500 million and $1 billion increased the most by 8.3%, followed by banks with less than $500 million increasing 6.4%, while banks with between $1 billion and $5 billion decreased 5.3%.
REGIONAL PRICING HIGHLIGHTS
In October, pricing was down across all regions except one. The Southwest experienced the largest decrease in October of 14.5%, and fell from highest priced to second highest priced region on a price to tangible book multiple of 175.5%. The West became the highest priced region at a 179.8% price to tangible book after having the only increase of 0.2% in the month. The Southeast and Mid-Atlantic regions decreased 12.3% and 7.4% in October to multiples of 161.3% and 154.0%, respectively, with the Mid-Atlantic being the lowest priced region on a price to tangible book multiple. The Midwest region logged a decrease in pricing of 9.2% in the month to a price to tangible book of 172.1%, and has become the third lowest priced region. The Northeast decreased 3.5% in October, and became the third highest priced region at a price to tangible book multiple of 173.5%.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.16%), Net Interest Margin (3.67%), and asset quality (NPAs/Assets of 0.54%). The Southeast was the second lowest priced region, and had the second weakest loan demand (Loan/Deposits of 91.4%), the weakest asset quality (NPAs/Assets of 0.72%) and middle of the road on profitability (ROAA of 1.04%) and NIM (3.65%). The Northeast region’s asset quality is tied for worst in the group (NPAs/Assets 0.72%) but kept a strong loan demand (Loan/Deposits of 97.0%). The Midwest region was the third lowest priced region despite second strongest profitability with an ROAA of 1.15% and a strong Net Interest Margin of 3.71%. 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%), and was the highest priced region despite weak loan demand with Loans/Deposits of 89.3%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.92%, the third weakest asset quality (NPAs/Assets 0.65%), but strong loan demand with Loans/Deposits of 95.7%.
On a median price to earnings basis, pricing was significantly down. The Northeast region saw the smallest decrease in pricing of 11.8%, but was still the second lowest priced region with a price to earnings multiple of 15.6x. The Southeast region remained the highest priced with a price to earnings multiple of 16.4x even though they had the largest decrease, 16.9% in October. The Southwest region saw a price decrease of 16.6% in October to a price to earnings multiple of 16.3x, dropping to the second highest priced of the regions. The Mid-Atlantic also declined 16.6% in October with a price to earnings multiple of 15.7x. The second lowest price decrease came in the West at 13.4%, becoming the third highest priced region with a 15.8x price to earnings multiple, while the Midwest experienced a decrease of 16.0% to a 14.7x 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 October, that differential was slightly down at an approximately 37% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During October, pricing for the three groups with total assets over $1 billion decreased by 8.9% on a median price to tangible book basis with a price to tangible book median of 188.8%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, which experienced a decrease in pricing of 7.4% to a 197.8% price to tangible book multiple. The group with assets greater than $10 billion saw a decrease in pricing of 8.9% to a median price to tangible book of 188.8%, but remained the second highest priced group. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 7.9% to a price to tangible book multiple of 158.7%. 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 146.2% and 128.9%, respectively, with pricing for the $500 million to $1 billion group decreasing 2.0% while the group less than $500 million decreased 14.5%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw the second largest decrease in pricing (18.6%). The group with assets between $500 million and $1 billion experienced the largest decrease in its price to earnings multiple, down 18.7% to 18.3x 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 decreases in pricing of 15.1% and 15.3% to price to earnings multiples of 16.3x and 15.9x, respectively. The highest priced was the group with less than $500 million, decreasing only 8.6% to an 18.4x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.83%) but a slightly higher loan demand (average Loans/Deposits of 94.26%) than institutions with assets over $1 billion (average of median LTM ROAA 1.10% and Loans/Deposits 92.2%).
Mergers & Acquisitions by Region
Bank consolidation has been up through October 2018 as compared to October 2017 with 207 transactions announced through October 2018 (106 transactions with terms), compared to 193 through October 2017 (117 transactions with terms). October 2018 was another busy month on the Mergers and Acquisitions front with 18 deals announced. Median pricing in 2018 was substantially higher than 2017 on a price to tangible book increase of 6.0% (median 1.75x), a price to 8% tangible book increase of 8.8% (1.90x), an increase of price to deposits of 7.8% (21.9%), and a price to earnings basis with a 16.3% increase on LTM earnings (25.0x).
The South region continues to have the highest number of transactions and number of transactions with terms with 46 deals through October of which 29 reported terms. Transactions in the South reported the second highest price to tangible book with a multiple of 183%, the second highest price to 8% tangible book (198%), the second highest price to earnings (26.2x) and the second highest price to deposits at 23.4%. The West region has reported 24 deals in 2018 with 19 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%, 227%, and 23.6%, respectively). The high pricing in the West is supported by the strongest asset quality deals (NPAs/Assets of 0.40%), the third highest level of profitability (ROAA 0.78%) and the largest median total assets. The Midwest and North Central regions each had over 30 transactions in 2018 with the Midwest having 45 (20 with terms), and the North Central having 39 (only six with terms). Both regions remained in the bottom half of pricing on a price to tangible book (Midwest at 164% and North Central at 162%). 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 second most profitable and had the second best asset quality, it was the smallest median total assets. The East – New England and the Southwest each eclipsed 25 deals through October (27 and 26, respectively). The Southwest dropped to the lowest priced on a price to tangible book basis of 1.58% and mid-level on a price to 8% tangible book basis of 1.86%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.4x multiple with 21 transactions with pricing, but it was the least profitable region (LTM ROAA 0.50%).
More information regarding nationwide M&A activity can be found here.