As the Historical vs. Current P/E Multiples chart below graphically depicts, relative P/E multiples across the banking landscape have elevated since the election, particularly when looking at the smaller and mid-cap institutions within the sector. Last year brought about its share of uncertainty and volatility (Brexit vote, Trump victory, expectations of four interest rate hikes that morphed into a single increase in December, etc.) with the post-November 7 rally in bank stock prices largely based upon a dramatic shift in business sentiment potentially translating into reality during 2017 and beyond:
-Meaningful tax reform - Might rates drop from approximately 35% to 25% or lower?
-Pro-growth sentiment in Washington, D.C. - Will it help fuel stronger economic growth as measured by GDP?
-Favorable interest rate environment - Will expectations of steadily rising rates help shape a steeper yield curve, and result in long-sought margin expansion?
-Regulatory relief - Could a roll back or significant revisions to Dodd-Frank help ease the time and costs associated with this post-crisis regulatory burden, particularly for our nation’s community banks?
There is always the risk that the market may have gotten ahead of itself in terms of “potential” becoming “reality,” but even the semblance of some form of lower taxes should intuitively result in stronger bottom lines and the ability to channel greater capital resources into either or both organic growth opportunities and decidedly shareholder-oriented initiatives (dividends, buybacks, etc.) That alone would potentially begin to recast the underlying fundamentals for the group and possibly return the above referenced P/E multiples back near historical norms.
With The Wall Street Journal posting recent articles with headlines like: “A Radical New Thought: Banks are Growth Stocks” (Eisen, R.L., November 15, 2016) and “Financials are Cheap, Even After the Rally” (Back, A., December 14, 2016) the cause for optimism remains. All will be monitoring closely the activities in Washington, D.C. after January 20 to gauge whether or not the euphoria (as reflected in the charts from the Michigan Banking Summary January 2017 link below) was appropriate. One thing is for sure - change will not occur overnight, but the prospects are compelling.
As you and your Board take your organizations forward, please do not hesitate to reach out to me and/or my colleagues at Austin Associates if we can be of any assistance in helping you to assess the competitive landscape. Best wishes for continued success in 2017!Michigan Banking Summary January 2017