Widescale rally during earnings lifts US bank valuations in July

Most US bank stocks rallied during the second-quarter earnings, sending the industry valuation to a four-month high at the end of July.

The 210 US banks in the S&P Global Market Intelligence analysis had a median price to tangible book value (TBV), adjusted for marks against held-to-maturity (HTM) securities and credit, of 129.5% as of July 31. That represents an increase from 113.9% at June 30 and is the highest month-end level since 130.7% at March 31.

The median total return in July for the 210 banks was 16.1%, surpassing the 11.8% return for the S&P US BMI Banks index and the 3.2% appreciation for the S&P 500. Only seven of the banks in the analysis traded down last month. Burke & Herbert Financial Services Corp. was the weakest market performer, with a negative 15.9% return. The Alexandria, Va.-based bank's net interest margin of 2.86% in the second quarter shrunk 16 basis points sequentially.

S&P Global Market Intelligence analyzed US banks trading on the Nasdaq, NYSE or NYSEAM with total assets of greater than $3 billion as of the most recent quarter. The analysis excludes banks with a negative HTM and credit adjusted TBV, banks in the mutual holding company ownership structure and other operating subsidiaries.

HTM and credit adjusted tangible book value is calculated as the sum of tangible common equity; unrealized gain or loss from HTM securities, tax-adjusted at the 21% corporate rate; and loss reserves; less nonperforming assets and loans 90 or more days past due but still accruing interest; divided by common shares outstanding.

Least expensive banks

Just like June, several of the top market performers in July were the cheapest banks by price to HTM and credit adjusted TBV.

Dallas-based First Foundation Inc.'s total return of 84.1% was an analysis-best. It has been the second-lowest valued bank for the last three months, ending July at 47.9% in price to adjusted TBV. The bank lowered its loans-to-deposits ratio to 93% as of July 20, down from 98% at June 30 and 106% at March 31. In the second quarter, First Foundation incurred a pre-tax goodwill impairment charge of $215.3 million and saw its net interest margin fall to 1.52% from 1.84% in the first quarter.

Seattle-based HomeStreet Inc.'s 55.4% monthly return was second-best. Homestreet has been the cheapest bank in the analysis for the last four months; at July 31, it traded at 32.8% of adjusted TBV. Like First Foundation, HomeStreet reported goodwill impairment of $39.9 million and margin compression of 33 basis points in the second quarter. But in contrast, HomeStreet's loans-to-deposits ratio jumped five percentage points to 111% as of June 30.

The other bank with a return of more than 50% was Fishers, Ind.-based First Internet Bancorp. It held the No. 4 rank by lowest valuation at July 31 and was No. 3 at June 30. During the second quarter, First Internet's loans-to-deposits ratio declined 5 percentage points, while its net interest margin contracted 23 basis points.

– Click here for S&P Global Market Intelligence's calculations for price to adjusted tangible book value as of July 31. – Read some of the day's top news and insights from S&P Global Market Intelligence. – Set email alerts for future Data Dispatch articles.

The No. 3-ranked bank at July 31 — Beverly Hills, Calif.-based PacWest Bancorp — announced after the market closed on July 25 an agreement to merge with Santa Ana, Calif.-based Banc of California Inc., marking the largest US bank deal so far in 2023. The initial market reaction to the deal speculation was decidedly negative, as shares of PacWest closed at $7.69 per share on July 25, down from $10.54 the previous day. But following confirmation of the rumor, the shares recovered much of the loss the following day, closing at $9.76. PacWest finished the month with a 14.1% return.

Citigroup Inc., at fifth place, had a monthly return of only 3.5%. Of the Big 4 US banks, Citigroup brought up the rear in terms of year-over-year change for pre-provision EPS, TBV per share and operating revenue.

Most expensive banks

Abilene, Texas-based First Financial Bankshares Inc. was the highest-valued bank in the analysis for the second consecutive month. Its price to adjusted TBV was 419.3% at July 31. First Financial's margin was resilient in the second quarter, down just 1 basis point for both quarter-over-quarter and year-over-year comparisons.

ServisFirst Bancshares Inc. had the fourth-best total return in July. With a 45.8% stock surge, it moved up to the No. 15 rank for most expensive bank. The Birmingham, Ala.-based bank's valuation was 231.3% at the end of July, up from 160.0% at June 30. While its net interest margin compressed 19 basis points, ServisFirst brought its loans-to-deposits ratio down to 94% from 100% during the second quarter.

Honolulu-based Bank of Hawaii Corp. slotted in with the third-highest valuation at 347.6%. A month earlier, it had traded at 233.4% of adjusted TBV. Because of a $625.4 million tax-adjusted mark against HTM securities, Bank of Hawaii had the largest gap between its price to adjusted TBV and price to basic TBV: more than 150 percentage points.