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Hopes of restoring the 'Texas premium,' M&A in the Lone Star State


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Hopes of restoring the 'Texas premium,' M&A in the Lone Star State

Any opinions expressed inthis piece are those of the author and do not necessarily represent the viewsof S&P Global Market Intelligence. Follow on Twitter @NWStovall.

Nowthat Texas-based banks have worked to rebuild their so-called "Texaspremium," there is some hope that the group can use the strongercurrencies to spark a rebound in M&A activity in the state.

Banksin Texas have historically traded at a higher multiple than other banks due tostrong economic growth in the state. That premium valuation eroded in2015 and as plunging oilprices clouded the economic outlook in Texas and sparked fears that banks couldexperience considerable credit problems.

Thoseissues have not come to pass and oil prices have bounced back from the lowssustained early this year, and Texas-based bank stocks have rebounded in kind.

Texasbanks rallied last week after oil prices rose to nearly $50 for the first timesince the spring on news that OPEC reportedly reached an understanding to cutcrude oil output. The recent move adds to considerable gains sustained sinceFebruary, with Texas-based banks jumping close to 50% since then.

Texasbanks regained their premium valuation on a price to tangible book value basisin early July and have expanded their multiples since then. The group nowtrades at roughly 1.8x tangible book value, well above the 1.5x multiple of theSNL Bank & Thrift Index. Texas banks have traded at a premium since thefinancial crisis and achieved their greatest outperformance in the spring of2014, when oil prices where near their peak.

Oilprices are still down 50% from the highs in the summer of 2014, but analystsare debating whether the recent rebound in black gold could change thefundamental environment for Texas-based banks. The Raymond James bank analystteam upgraded the majority of energy-exposed banks in its coverage universe inearly May, noting that the worst case scenario was already baked into prices.The analysts reiterated its position last week, even after the significantoutperformance in the Texas group over the last few months.  

Otheranalysts noted that the rebound in oil prices could offer some credit relieffor banks in energy-centric areas. Evercore ISI analyst John Pancari said lastweek that banks appear comfortable with reserve levels for energy credits andthe recent upswing in oil prices could "pave the way for releases."

"Thequestion will then the reserves simply get allocated to other loanportfolios - e.g. CRE or auto," Pancari wrote in a Sept. 29 note.

TheStreet has not seen signs of stress in the energy sector spreading to othersectors yet. Piper Jaffray analyst Brett Rabatin visited 10 Texas-based banksand a private equity firm focused on the energy space in early September andcame away feeling more positive on the credit quality at the institutions.While there is some weakness in the Houston market, Rabatin said Dallas marketremains quite strong and the fundamental environment for Texas-based banks isfar better than many feared six months ago.

"Ithink these banks are going to report numbers that give investors more comfortaround credit," Rabatin said in an interview after the Texas trip.

Rabatinsaid the Texas bank group could break out further if M&A activity in thestate resurges in force.

Dealactivity in Texas, which had been one of the strongest markets in the U.S., hasslowed notably thisyear with decreases in oil prices. Through Oct. 4, 13 deals surfaced in Texas,or 17 annualized. That is down from 22 deals in 2015 and 27 deals in 2014.  

C.K.Lee, a managing director in the financial institutions group at Commerce StreetCapital, said at the recent 8th annual M&A Symposium hosted by S&PGlobal Market Intelligence that the erosion of the so-called Texas premium hasnegatively impacted M&A activity in the state.

Leefurther noted that there are few "obvious" in-state synergisticopportunities for the larger, seasoned acquirers in Texas. He said smallerpotential targets could allow buyers to diversify and grow their funding basesbut there are few indications of interest in expanding in rural markets.

Still,he noted that a number of Texas banks have recently bolstered their balancesheets through capital raises and those transactions could reduce regulatorypressures and enhance optionality going into 2017.

Rabatincame away with the feeling that the election, the risk of a recession and thelower for longer interest rate environment has slowed acquisition talks. "Itsounds like 2017 could finally be the year we see more activity in Texas asless uncertainty brings an end to a lack of deal-making," according toRabatin.