Even though the banking industry
The KBW Bank Index stood at 92.50 on Wednesday, down roughly 10% from July 26 when the index reached a high point for the year at 103.12. Over the last three months the bank index is down more than 3.5% while the S&P 500 is up about 3.3%.
This has led to depressed pricing in bank acquisitions and possibly fewer deals being reached, something that is likely to continue, analysts said.
"When markets are down, the seller may feel compromised because his price is undermined, and the buyer may feel compromised because the market strength of his currency is diminished,” said Bart Smith, managing director and partner with Performance Trust Capital Partners. “Even if the same forward economics are favorable, the emotional connection to the market can slow transactional activity.”
To be sure, acquisition activity has been healthy through much of the year, and
The average price to tangible book value for whole-bank deals announced through Aug. 23 was 157%, according to data from KBW and Compass Point. That’s down from 174% last year and 165% in 2017. So far, more than 170 deals have been announced through Friday, according to data from KBW and S&P Global Market Intelligence.
The correlation between deal volume and market pricing is not necessarily based on the economics of a potential transaction, Smith said. There are certain metrics, such as high price to tangible book values, that make deals attractive when market values are strong. If those metrics become compromised, even when the same long-term benefits of a deal are attractive, then transaction activity will soften, he said.
That’s what is happening now, and deal volume won’t increase until the participants feel there is more of a win-win scenario.
Daryle DiLascia, head of investment banking for Performance Trust, said sellers want to be able to announce a higher transaction price, which is often a function of the buyer’s currency. That’s currently being hampered by volatile bank stocks.
In reality, the closing price – which is determined several months after a transaction announcement – is often different than the announced price. The true economic value received by the seller can also be vastly different in retrospect, particularly for all-stock transactions, DiLascia said.
"Over the long term, a seller may be better off accepting stock as a form of acquisition currency when buyer valuations are lower," DiLascia said.
Deal making has been made even more difficult with the market seeming to punish acquirers for overpaying, said Jon Winick, CEO of Clark Street Capital. That’s made expensive acquisitions even more unappealing, he said.
Deal activity for private banks has been stymied since executives at these institutions don’t have the daily reminder of the change in their valuations that public banks do, said Stephen Scouten, an analyst at Sandler O’Neill. This group has been weak during the past year but it still takes time for private banks to adjust their asking price. Because of that, the bid-ask spread has been too wide.
But the pace of smaller bank deals, particularly those involving private banks acquired in all-cash transactions, may pick up given that seller expectations have become more rational with the decline in interest rates, said David Chiaverini, an analyst at Wedbush Securities.
"Banks that were considering selling realize that there is not much potential for them to grow earnings from here and they do not want to risk operating through another downturn," Scouten said.
As for deals that have already been announced, the drop in bank stock prices should not have an effect.
This includes BB&T’s
BB&T, based in Winston-Salem, N.C., agreed Iin February to pay $28.1 billion in stock for SunTrust. BB&T disclosed in a regulatory filing late last month that the deal's value has falled by 5%, to $26.7 billion.
However, BB&T's shares on Thursday were essentially unchanged from where they were when the deal was announced.
Scouten said investors view BB&T as a less volatile company with a more neutral balance sheet than many other regional banks. Its stock has also outperformed the broader group so far this year, so there should be no issues around the deal pricing, he said.
"I haven’t seen any fixed-price deals of note, and there hasn’t been much divergence in stock performance, so no acquirer has underperformed to a degree to potentially invalidate a transaction," Scouten said.
