In September 2016, public bank stocks lost ground for the first time in the last three months and underperformed the broader market as investors were cautious leading up to the first presidential debate following mixed economic data releases and a generally more dovish view of the near-term path of U.S. monetary policy from participants in the latest FOMC meeting. The U.S. Labor Department announced that total nonfarm employment climbed by 151,000 in August, falling short of the consensus estimates which called for the creation of 175,000 jobs, as the unemployment rate stayed at 4.9% for the third straight month. The Bureau of Labor Statistics reported that the number of job openings increased to 5.9 million on the last business day of July. Hires and separations were 5.2 million and 4.9 million, respectively. The illegal-account opening scandal at Wells Fargo dominated headlines in the banking industry as the U.S. Department of Labor’s Wage and Hour Division began a review of the company’s labor practice. Making matters worse, former employees filed a second lawsuit against the bank claiming they were wrongfully terminated for failing to meet sales quotas, which have been scrutinized as a major contributing factor to the crisis surrounding the banks.
In other news, the FOMC decided to keep the federal funds rate between 25 – 50 basis points in September. Participants in the latest FOMC meeting took a more dovish view of the path of the U.S. monetary policy following lower projected 2016 GDP and higher median expectations for unemployment. Federal Reserve Chair Janet Yellen was quoted as saying “If we allow the economy to overheat we could be faced with having to raise interest rates more rapidly than we would want,” signaling the Fed wants to make sure the job market expansions is sustainable over the medium term.
Bank M&A pricing was down year-to-date through September compared to year-to-date pricing through September 2015 on slightly lower volume (see chart below).
The SNL Bank Index decreased 3.5% in September, and underperformed the S&P 500 which decreased 0.1%, while banks below $500 million posted the largest increase of 3.0%. Banks between $500 million and $1 billion gained 2.0%, while banks between $1 billion and $5 billion gained 0.9% during the month.
Over the three month period ending September 2016, the SNL Bank Index increased 7.3% while the S&P 500 increased 3.3%. The trend differed over the prior twelve months as the SNL Bank Index increased 1.0% while the S&P 500 increased 12.9%.
REGIONAL PRICING HIGHLIGHTS
The Southeast region saw the largest increase in median price to tangible book (5.0%) in September and is now trading in-line with the West and Southwest. The increase in oil prices in September helped boost pricing growth in the Southwest region, which is heavily tied to the energy sector and increased 1.5%, the second straight month of an increase in pricing. The West, after growing the largest of any region in August in price to tangible book, was the only region to decrease in pricing (5.7%) in September and is now the second lowest price by region.
At 1.57x tangible book, the Northeast region claimed the highest median price among all regions as the region reported the strongest median NPAs/Assets (0.75%) and the highest median Loans/Deposits (96.7%). The Mid-Atlantic region reported the lowest median tangible book price of any region at 1.38x, and was up just 0.8% from August 2016, while the West was the only region to decrease, 5.7% to 1.52x book. The Midwest and Southwest reported median tangible book pricing of 1.53x and 1.54x (up 3.9% and 1.5%, respectively from August 2016) while the Southeast reported a median 1.55x, up 5.0% from August 2016.
On a median price to earnings basis, the Southwest reported the highest pricing for the second straight month at 17.6x LTM earnings while the Southeast followed closely reporting a 17.2x LTM earnings, followed by the Northeast (16.2x), Mid-Atlantic (16.1x) and West (16.0x) with the Midwest at a distant median 15.4x LTM earnings on the low end. Only the West and Southwest decreased on a price to earnings basis in September (1.6% and 0.6%, respectively), while the Northeast showed the largest increase on a price to earnings basis, up 3.1% from August 2016.
PRICING BY SIZE
The disparity of pricing based on size continues to grow as the two largest groups averaged a 1.88x price to tangible book multiple. The banks between $5 billion and $10 billion reported a median price of 2.12x tangible book (up 0.6% from August 2016), remaining the highest priced group, followed by banks greater than $10 billion at 1.64x (down 4.0% from August 2016), while the two smallest sized groups averaged a 1.07x multiple. The smallest banks, those below $500 million, were down 3.0% in September to 1.08x, while banks between $500 million and $1 billion remained the lowest priced group while increasing 1.4% during the month of September to 1.07x. Mid-sized banks, those between $1 billion and $5 billion, increased 1.9% since August 2016 and were priced at 1.50x tangible book basically midway between the smallest and largest public institutions.
On a median price to LTM earnings basis, banks with assets below $500 million were up the highest of any group at 6.1% in September to 18.9x and surpassed the banks between $5 billion and $10 billion as the highest priced group on the highest median LTM net interest margin of 3.67%. Banks with assets between $5 billion and $10 billion reported the second highest multiple of 18.0x and were down 0.4% since August 2016 on the highest median ROAA (1.05%). The largest banks reported a median price to LTM earnings of 15.9x, and reported the second highest median ROAA (0.97%). Banks between $500 million and $1 billion reported the lowest pricing at 14.5x earnings and highest median tangible equity to tangible assets (9.71%), while midsized banks between $1 billion to $5 billion posted mid-range pricing at 16.3x LTM earnings with LTM net interest margins of 3.60% at the low end and median ROAA of 0.91% at mid range.
Mergers & Acquisitions by Region
Bank consolidation continued at a slightly slower pace on a year-to-date basis through September 2016 with 171 transactions compared to 183 reported through September 2015. Approximately 55% of the transactions announced year-to-date through September 2016 reported pricing terms, while 51% of the transactions through September 2015 reported terms. Median year-to-date pricing through September 2016 remained down across the board at a 4.9% decrease on tangible book (1.33x), 4.3% decrease on 8% tangible book (1.42x), 16.5% decrease on LTM earnings (18.6x), and 3.6% decrease on deposits (16.2%) compared to year-to-date pricing through September 2015. Only two transactions were reported in the Southwest Region with pricing and had the highest price to tangible book multiple at a median price to tangible book multiple of 1.51x on the highest median tangible equity to assets (11.7%), lowest NPAs/Assets (0.35%) and highest median ROAA (0.85%). The East–New England, South and Midwest regions had the next highest median price to tangible book multiples (1.39x and 1.35x and 1.35x, respectively). However, the East-New England had the lowest median tangible equity level (9.1%) while the South reported the next lowest tangible equity level (9.7%) but Midwest reported the second strongest tangible equity level at 10.5%. The West region reported the highest price to LTM earnings (20.1x) on a median ROAA of 0.63% (third highest of the regions). Thirty-two transactions were reported in North Central year-to-date with only four disclosing pricing (median 1.28x tangible book).
More information regarding nationwide M&A activity can be found here.