Merger activity in the banking industry moderated somewhat in February, at least in terms of deal count; total deal value in February approached $8 billion. Seasonality was a factor as a similar pattern was seen in both February 2020 and February 2019. To be sure, deal discussions are accelerating, particularly driven by compressed net interest margins. Indeed, S&P Global projects community bank net interest margins will compress further in 2021 then will remain largely flat through 2024.
Deal valuations were a mixed bag in February, though only 3 of February’s transactions released pricing details: February’s median price-to-earnings multiple was just under 33x, a 66% increase from January. Conversely, February’s median price-to-tangible book value multiple was approximately 1.25x, a slight decrease relative to the January median.
The seemingly incongruous divergence in median deal multiples in February warrants the reiteration of a cautionary tale when using multiples to impute value: median transaction multiples can serve as a preliminary tool – albeit of the ‘blunt instrument’ variety – for comparing valuations across deals and over time. But multiples are not a recommended tool of precision for determining a bank’s actual sale value, whether that bank is your own or of a target bank under acquisition consideration. A bank’s sale value is (or at least should be) informed not by multiples but by specific variables including future earnings, cost synergies, location, size, profitability, deposit base, credit quality, growth characteristics, management capabilities, target scarcity, and, ultimately, acquirer demand. Put simply, a seller’s actual sale value is the highest price a buyer is willing (and able) to pay. By definition, multiples are just the calculated output of a simplistic mathematical ratio.
Separately, the significant appreciation in most bank stock prices in recent months is further fueling M&A discussions as would-be buyers find themselves with stronger acquisition currencies. Many publicly-traded banks have seen their stock prices recover back to or even ahead of pre-COVID levels and, in quite a few cases, notch all-time highs.
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