In the month of September the SNL Bank Index was outperformed by the S&P 500 with the SNL Bank Index decreasing 4.5% and the S&P 500 increasing 0.4%. Bank stocks and the broader market traded around progress in tariff deals, a strong jobs report, increased treasury yields, and Italy’s debt issues.
The month began with a strong jobs report for August noting a lower unemployment rate and a 2.9% year-over-year rise in hourly earnings. However, a drop in tech and oil stocks as well as a hint of additional Chinese tariffs had both the S&P 500 and bank stocks slightly declining during the early part of the month. Through the middle of the month, the market and bank stocks floated up and down amid an announcement of additional tariffs and a rise in treasury yields. The 10% tariff rate was lower than expected. During the latter part of the month, bank stocks fell after reports showed that Italy will increase deficit spending to 2.4% of GDP, to a level which many believe is the outer bound sovereign bond markets will tolerate.
In other related news, the Federal Reserve raised short term interest rates 25 basis points at the end of September and kept its forecast for one more hike later this year. After the swearing in of Richard Clarida as a board member in the Federal Reserve, three more nominees are awaiting a vote which would result in all seven board member slots being filled if elected.
In economic news, data from the U.S. Department of Labor reported that nonfarm payrolls increased by 134,000 in September, below the consensus estimates of 185,000. The unemployment rate declined to 3.7% while the average hourly earnings for employees rose by eight cents, or 0.3% month over month. In August, U.S. existing-home sales remained steady after four straight months of decline. Sales are 1.5% below the levels from a year ago, according to the National Association of Realtors. The median existing-home price for all housing types was $264,800, up 4.6% from the prior year.
Bank M&A pricing was up significantly in September 2018 compared to September 2017 on a slightly higher number of transactions (see chart below).
The SNL Bank Index showed only a moderate decline in the beginning of September, even reaching positive levels in the third week, but then fell to end the month down 4.5% underperforming the S&P 500 which gained a modest 0.4% during the month. Driving the SNL Bank Index decline were banks between $1 billion and $5 billion decreasing 4.2%, while banks between $500 million and $1 billion decreased 0.3% in the month, and banks below $500 million remained flat.
Over the three month period ending September 2018, the SNL Bank Index increased 1.4% while the S&P 500 increased 7.2%. Over the prior twelve months, the SNL Bank Index increased 5.6% and the S&P 500 increased 15.7%. Banks between $500 million and $1 billion increased the most by 15.3%, followed by banks with less than $500 million increasing 10.6%, and banks with between $1 billion and $5 billion increasing 2.8%.
REGIONAL PRICING HIGHLIGHTS
In September, regional pricing was down across all regions. The Northeast experienced the largest decrease in September of 13.0%, and fell to the third lowest priced region on a price to tangible book multiple of 179.7%. The Southwest remained the highest priced region at a 205.3% price to tangible book after a 6.7% decrease in the month. The Southeast and Mid-Atlantic regions decreased 8.7% and 3.5% in September to multiples of 183.9% and 166.3%, 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 4.7% in the month to a price to tangible book of 189.7%, but has become the second highest priced region. The West decreased 5.7% in September, and remained the second lowest price region at a price to tangible book multiple of 179.5%.
Pricing for public banks in the Southwest was supported by strong earnings (ROAA of 1.06%), Net Interest Margin (3.66%), and asset quality (NPAs/Assets of 0.58%). The Southeast was third highest priced region, and had the second weakest loan demand (Loan/Deposits of 91.3%), the second weakest asset quality (NPAs/Assets of 0.69%) and middle of the road on profitability (ROAA of 0.95%) and NIM (3.67%). The Northeast region’s asset quality has dropped to worst in the group (NPAs/Assets 0.71%) but kept a strong loan demand (Loan/Deposits of 97.5%). The Midwest region was the second highest priced region and profitability remained the best of any region with an ROAA of 1.09% and a strong Net Interest Margin of 3.67%. The West was the third most profitable region with an ROAA of 1.04% and had the best Net Interest Margin of 3.84%, the strongest asset quality (NPAs/Assets 0.41%), but was the second lowest priced region on weak loan demand with Loans/Deposits of 89.2%. The lowest priced region, the Mid-Atlantic, had the lowest profitability with an ROAA of 0.84%, the third weakest asset quality (NPAs/Assets 0.66%), but strong loan demand with Loans/Deposits of 97.1%.
On a median price to earnings basis, pricing was also down. The Northeast region saw the second largest decrease in pricing of 7.4% to drop to the second lowest priced region with a price to earnings multiple of 17.6x. The Southeast region became the highest priced with a price to earnings multiple of 19.7x logging a 3.6% decrease in September. The Southwest region saw the largest price decrease of 8.9% in September to a price to earnings multiple of 19.6x, dropping to the second highest priced of the regions. The Mid-Atlantic was the third highest priced region after declining 3.3% in September with a price to earnings multiple of 18.8x. The third largest price decrease came in the West with 4.4%, maintaining the third lowest priced region, while the Midwest experienced a decrease of only 0.5% to a 17.5x price to earnings multiple, but remained 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 September, that differential was slightly down at approximately 38% higher median price to tangible book pricing for the peers with assets greater than $1 billion. During September, pricing for the three groups with total assets over $1 billion slightly decreased by 6.6% on a median price to tangible book basis with a price to tangible book median of 207.3%. The highest priced asset class remained the group with assets between $5 billion and $10 billion, although the group experienced the largest decrease in pricing of 7.9% in September to a 213.7% price to tangible book multiple. The group with assets greater than $10 billion saw a decrease in pricing in September of 6.6% to a median price to tangible book of 207.3%, but remained the second highest priced group. The group with assets from $1 billion to $5 billion saw a decrease in pricing of 5.6% in September to a price to tangible book multiple of 172.4%. 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 similar price to tangible book multiples of 149.2% and 150.9%, respectively, although pricing for the $500 million to $1 billion group decreased 0.4% while the group less than $500 million increased 3.2%. On a price to LTM earnings basis, the largest bank group (over $10 billion) saw the largest decrease in pricing (6.3%). The group with assets between $500 million and $1 billion experienced the only increase in its price to earnings multiple of 8.3% to 22.6x and is the 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 3.1% and 4.7% to price to earnings multiples of 19.2x and 18.8x, respectively. Remaining flat was the group with less than $500 million, maintaining a 20.1x price to earnings multiple.
Financial institutions under $1 billion reported much lower LTM ROAA (average of medians 0.79%) but a slightly higher loan demand (average Loans/Deposits of 94.2%) than institutions with assets over $1 billion (average of median LTM ROAA 1.04% and Loans/Deposits 93.2%).
Mergers & Acquisitions by Region
Bank consolidation has been up through September 2018 as compared to September 2017 with 189 transactions announced through September 2018 (97 transactions with terms), compared to 173 through September 2017 (105 transactions with terms). September 2018 was another busy month on the Mergers and Acquisitions front with 13 deals announced. Median pricing in 2018 was substantially higher than 2017 on a price to tangible book increase of 5.8% (median 1.74x), a price to 8% tangible book increase of 8.1% (1.90x), an increase of price to deposits of 7.7% (22.2%), and a price to earnings basis with a 16.5% increase on LTM earnings (25.2x).
The South region continues to have the highest number of transactions and number of transactions with terms with 42 deals through September of which 26 reported terms. Transactions in the South reported the second highest price to tangible book with a multiple of 179%, the second highest price to 8% tangible book (200%), the second highest price to earnings (26.5x) and the second highest price to deposits at 23.5%. The West region has reported 21 deals in 2018 with 16 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 (207%, 230%, and 23.7%, respectively). The high pricing in the West is supported by the second strongest asset quality deals (NPAs/Assets of 0.47%), the second 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 41 (20 with terms), and the North Central having 36 (only six with terms). Both regions remained the two lowest priced 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 earnings (20.6x) finishing second lowest. Although it was the most profitable and had the best asset quality, it was the smallest median total assets. The East – New England and the Southwest each eclipsed 20 deals through September (25 and 24, respectively). The Southwest remained the third lowest priced on a price to tangible book basis of 1.71% and mid-level on a price to 8% tangible book basis of 1.89%. The East – New England region remained the highest priced on a LTM earnings basis with a 32.6x multiple with 19 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.