Public Bank Stock Performance – March 2016
Public bank stocks had their first positive month of the year in March at a slightly slower rate than the broader market as investors are beginning to gain confidence that the U.S. economy will avoid a sharp slowdown. Oil prices, which have driven much of the market volatility in 2016, gained ground in March. The Federal Open Market Committee announced it will keep the target range of its federal funds rate between 25 – 50 basis points, stating a range of recent indicators points to additional strengthening of the labor market, and noted inflation had picked up in recent months, though below the central bank’s long-term 2% target. Markets support was found in news that private sector employment increased by 200,000 jobs in March. Further, the U.S. Labor Department reported total non-farm payroll employment increased by 242,000 in February. The unemployment rate was unchanged at 4.9% and total jobs added for December and January were revised upward to 271,000 from 262,000 and to 172,000 from 151,000 respectively. The Conference Board Consumer Confidence Index reached 96.2 in March, compared to 94.0 in February. M&A pricing was down year-to-date through March compared to year-to-date pricing through March 2015 on slightly lower volume (see chart below).
The SNL Bank Index jumped 5.9% in March, but underperformed the S&P 500 which increased 6.6% as banks between $1 billion and $5 billion posted the largest increase of 4.1%. The SNL Bank Index for banks less than $500 million was the only group to lose ground, decreasing 1.6%. Banks between $500 million and $1 billion gained 3.0% during the month.
Over the three month period ending March 2016, the SNL Bank Index declined a whopping 11.6% while the S&P 500 increased 0.8%. The trend continued over the prior twelve months as the SNL Bank Index declined 8.9% while the S&P 500 declined only 0.4%.
REGIONAL PRICING HIGHLIGHTS
Southwest region saw the largest increase in price to tangible book for the second consecutive month in March, yet remained the lowest price among regions along with the Mid-Atlantic. The increase in oil prices in March contributed to the Southwest region’s increase in pricing, as the region is heavily tied to the energy sector. The only region that did not increase in pricing in March was the Mid-Atlantic and matched the Southwest at the bottom of the pricing spectrum. The Northeast maintained its position as the highest price to tangible book pricing based on good credit quality and the highest loan/deposits while the West closely followed.
At 1.52x tangible book, the Northeastern region claimed the highest median price among all regions (up 0.5% from February 2016) as the region reported strong NPAs/Assets (0.83%) and the highest loan/deposit ratio (94.1%) on a last twelve month (“LTM”) basis. The Southwest region reported the lowest tangible book price of any region at 1.29x, but was up 7.8% (more than any other region) from 1.19x in February 2016 while the Mid-Atlantic also posted a price to tangible book of 1.29x (down 0.1% from February 2016). The West and Southeast reported median tangible book pricing of 1.51x and 1.41x (up 0.2% and 1.5%, respectively from February 2016) while the Midwest reported 1.43x (up 3.6% from February 2016). While pricing generally improved in March, median prices are still down across all regions since December 2015.
On a median price to earnings basis, the Southeast reported the highest pricing at 15.9x LTM earnings while the Northeast reported 15.5x LTM earnings, followed by the West (15.3x), Mid-Atlantic (15.1x) and Midwest (13.8x) with the Southwest at 13.3x LTM earnings on the low end. The Southeast was the only region showing a decrease in price to earnings since February 2016, decreasing 1.1%, while the Mid-Atlantic showed the largest increase on a price to earnings basis, up 4.6% from February 2016. The West continued to report the highest LTM net interest margin (3.81%) followed by the Southeast region (3.69%) but continued to report the highest NPAs/Assets (1.11%). The West reported the highest LTM ROAA at 1% followed by the Midwest region at 0.97% and Southwest at 0.95%. The Southwest region maintained a high premium during the last downturn due to strong oil and gas prices, but has since seen their values significantly cut during the current fall in oil prices. The Southwest is now at the bottom range of pricing on both price to tangible book and price to earnings despite strong median earnings, strong loan to deposits at 85% and a net interest margin of 3.6%, the third highest.
PRICING BY SIZE
Pricing continues to be proportional to asset size and earnings with the disparity increasing as only the two largest sized bank groups gained on pricing. The bank between $5 billion and $10 billion had a median price of 1.86x tangible book followed by banks greater than 410 billion at 1.56x, while the two smallest sized groups averaged a 1.02x multiple. The smallest banks, those below $500 million, continued to have the lowest price to tangible book multiple, down 1.8% in March to 0.99x, while banks between $5 billion and $10 billion remained the highest priced group and increased in the month of March (6.8%) to 1.86x. Mid-sized banks, those between $1 billion and $5 billion, decreased 0.9% since February 2016 and were priced at 1.40x tangible book. Banks over $10 billion gained 6.5% in March to 1.56x, while banks between $500 million and $1 billion reported a price to tangible book multiple at 1.04x down 1.7% since February 2016.
On a median price to LTM earnings basis, banks with assets between $5 billion and $10 billion once again reported the highest multiple of 16.2x, up the most (3.1%) of any group from February 2016, on the highest ROAA (1.01%) on strong LTM net interest margin (3.66%) and lowest NPAs/Assets (0.67%). The largest banks reported a median price to LTM earnings of 13.8x, up 1.9% from February 2016 and reported the second highest ROAA (0.97%). Banks with less than $500 million reported the second highest price to earnings ratio of 15.3x (down 0.7% since February 2016) and the lowest ROAA (0.34%). Banks between $500 million and $1 billion reported the lowest pricing at 13.2x earnings and highest LTM net interest margin (3.67%), but is the best performer since year-end 2015 (down just 1.6%) while midsized banks between $1 billion to $5 billion posted mid-range pricing at 14.7x LTM earnings on the second highest LTM net interest margins of 3.66%.
Mergers & Acquisitions by Region
Bank consolidation continued at slightly slower pace on a year-to-date basis through March 2016 with 57 transactions compared to 61 reported through March 2015. Approximately 58% of the transactions announced year-to-date through March 2016 reported pricing terms, while 52% of the transactions through March 2015 reported terms. Median year-to-date pricing through March 2016 was down across the board at a 10.5% decrease on tangible book (1.28x), 18.0% decrease on 8% tangible book (1.31x), 15.6% decrease on LTM earnings (19.3x), and 17.9% decrease on deposits (14.3%) compared to year-to-date pricing through March 2015. Only one transactions was reported in the Southwest Region (which typically has the highest price to tangible book multiples) which had a price to tangible book multiple of 1.74x due to a 1.40% ROAA and an equity level of 14.4%. The West and East–New England regions had the next highest median price to tangible book multiples (1.37x and 1.33x, respectively). The South reported the highest price to LTM earnings (29.0x) on a median ROAA of 0.59%. Banks selling in the Midwest reported strong tangible equity at 10.8% of assets and lower median tangible book multiples (1.16x). Thirteen transactions were reported in North Central but only two disclosed pricing (0.57x tangible book at the median).
More information regarding nationwide M&A activity can be found here.Back to the Knowlege Center