Banking industry update Primatics Financial Risk and Finance Banking Industry Event, May 12, 2015 — Chicago, Ill. This document is confidential and is intended solely for the use and information of the SNL Financial and the individual, group, or corporation to whom it is addressed.
Agenda Bank Performance Bank M&A Brief Regulatory Update Outlook 2
Bank Performance 3
Fundamentals improving but remain challenged • Credit quality has improved dramatically. Credit leverage waning • Deposit growth has outpaced loan growth for years • Loan growth has shown signs of rebounding, but weakened in the last two quarters • Banks have invested excess liquidity in their securities portfolios. Some compelled to do so by regulations like the LCR • The rate environment continues to weigh on NIMs • Still hoping for rate increases. Fed rate hikes kicked further out in ‘15. Low rates globally have pushed long-term rates lower 4 Confidential – Not for Redistribution
Credit leverage waning 5 Confidential – Not for Redistribution
Credit leverage waning 6 Confidential – Not for Redistribution
Deposit growth faster than loan growth 7 Confidential – Not for Redistribution
Loan growth faster at midsize banks since the crisis Median loan growth by asset group (%) 25.00% 20.00% 15.00% Since '08 10.00% 5.00% 0.00% Banks over $250B Banks $50B-$250B Banks $10B-$50B Banks $1B-$10B Banks below $1B Excludes industrial banks, nondepository trusts, cooperative banks, thrift holding companies. Includes historical institutions that were still current at the end of a given year. Source: SNL Financial 8
Loan-to-deposit ratios have fallen Loans-to-deposits ratio for US bank and thrifts by asset size (%) Represents medians for asset buckets • Loan-to- deposit ratios have declined across the industry • Nation’s largest banks have seen greatest decrease 9
Securities larger portion of bank balance sheets • Slow loan growth, excess liquidity, regulation has prompted banks to buy more securities • Big banks have been forced to buy securities due to LCR • Securities have grown to ~20% of assets 10
LCR driving security purchase activity US government, state & municipal and residential mortgage backed securities at US banks & thrifts 11
Rates, LCR weighing on securities yields Securities yields for US banks and thrifts by asset size (%) Represents medians for asset buckets 12
Yields under pressure, no more funding relief Yields and costs for US bank and thrifts (%) 13
NIM chart by asset size • Banks’ NIMs fall Net interest margin for US bank and thrifts by asset size (%) to 3.15% in ‘14 Represents medians for asset buckets • NIMs remained under pressure in Q1 • Low rates, slow loan growth, competition for loans & excess cash balances have weighed on margins • No one safe from margin pressure 14
Cost of low rates, regulation evident Profitability at US banks and thrifts (2004- 2014) Represents medians for asset buckets Change ROAA (%) 2004Y 2014Y (bps) -31 Industry aggregate 1.32 1.01 Above $250B 1.36 0.79 -57 $50B-$250B 1.31 0.99 -32 -35 $10B-$50B 1.30 0.95 $1B-$10B 1.16 0.93 -23 Below $1B 1.01 0.83 -18 ROAE (%) Industry aggregate 13.67 8.96 -471 Above $250B 15.50 9.11 -639 -701 $50B-$250B 15.15 8.14 $10B-$50B 15.65 8.33 -732 $1B-$10B 12.84 8.57 -427 -225 Below $1B 9.90 7.65 Efficiency ratio (%) Industry aggregate 57.91 61.83 392 373 Above $250B 59.33 63.06 $50B-$250B 51.18 62.84 1166 $10B-$50B 56.33 60.93 460 831 $1B-$10B 57.61 65.92 Below $1B 65.10 70.83 573 Data compiled April 7, 2015. Analysis is based on commercial banks, savings banks and savings institutions regulatory filings. Net income used in the analysis was not adjusted for S-corps. ROAA = return on average assets; ROAE = return on average equity Efficiency ratio = total noninterest expense less amortization of intangible assets as a percent of noninterest income and net interest income on a fully taxable equivalent basis if available. Source: SNL Financial 15 Confidential – Not for Redistribution
Bank M&A Activity 16
Drivers of Bank M&A • Challenging earnings environment due to slow loan growth, low rates and heightened regulatory costs • Need for scale • Sellers seeing upside post deal in the right transactions. Investors supporting many deals • Board and management fatigue taking a toll • More banks seem to be improving regulatory standing, allowing for a few more buyers • Mostly smaller deals 17
Bank M&A Activity Since 2013 • Slower start to ‘15 because of volatility • But deal activity higher, in part due to a handful of deals • As growth challenged and currencies stronger, many banks considering M&A 18
Banks M&A Activity last 10 years 19 Confidential – Not for Redistribution
Pace of bank M&A activity 20 Confidential – Not for Redistribution
Recent bank M&A pricing • Bank M&A pricing is increasing • A handful of big ticket transactions a year • Banks beginning to pay up for strong deposit franchises 21
Notable deals • City National sold to Royal Bank of Canada for $5.4B, or 2.6x TBV • Surprising – no one considered them a seller – great franchise that was asset sensitive. Why sell before rates go up? • City National essentially brings forward the impact of higher rates, maintains its brand • RBC pays up to diversify out of Canada 22 Confidential – Not for Redistribution
Notable deals • Square 1 sold to PacWest for $849M, or 2.62x of TBV in early March • Surprising – Another great performer sells • Sold at a good multiple • PE investors made close to 5x original investment • Square 1 and City National sale had some speculating that sellers were worried about the future • Perhaps just as concerned that rates weren’t moving higher in near term 23 Confidential – Not for Redistribution
Notable deals • Bridge Capital Holdings sold to Western Alliance for $425M, or 2.22x tangible book value • Another strong performer selling at a high price tag • PE firms were sizable investors in Bridge Capital. PE firms made a large return & deal came roughly 5 years after investment 24 Confidential – Not for Redistribution
Regulatory Update 25
General regulatory issues • • Stress testing: Smaller banks Heightened expectations beginning the exercise much earlier – some voluntarily, some at the behest of • Still lots of focus on compliance regulators • Banks increasingly say they need to be • Interest rate risk $15B to $20B in assets to absorb the cost of moving above $10B in assets • CECL — looming around the corner • UDAAP & Fair lending • BSA / AML 26
Regulatory changes • New treatment of brokered deposits – any third party that facilitates a deposit classified as a deposit broker • Many more deposits classified as brokered • Some companies saw big bump 27 Confidential – Not for Redistribution
Regulatory changes • Regulators finalized a rule allowing banks up to $1B in assets to increase leverage at HoldCo • Asset threshold previously $500M • Believed that more banks could easily raise capital – issue debt and downstream it to the bank sub • More advisers encouraging banks to consider issuing sub debt • Josh Siegel at StoneCastle is trying to create pooled sub debt offerings as a result – call it the new pooled TruPS 28 Confidential – Not for Redistribution
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