2024 Mid-Year Market Update
Year-to-date through August 23, the Nasdaq Bank Index and the KBW Nasdaq Regional Bank Index appreciated by 14% and 6%, respectively, compared to 18% appreciation by the S&P (see Figure 1). Through June, bank stocks were flat to down from year-end 2023 but rallied in July to outperform the broader market with the Nasdaq Bank Index and the KBW Regional Bank Index appreciating by 17% and 19%, respectively, compared to 1% appreciation for the S&P in the month of July.
After a period of underperformance due to earnings pressure from rising rates and falling margins, banks rallied strongly during the reporting of 2Q24 earnings in July as it became apparent NIMs for most banks had or soon would stabilize and prospectively widen as the Fed moves to reduce short-term policy rates.
After steadily declining from a peak of 3.65% in the last quarter of 2022, the median net interest margin for all banks traded on the NYSE and Nasdaq widened by 3 bps in 2Q24 compared to 1Q24. Furthermore, as shown in Figure 2, 66% of all banks reported net interest margin expansion quarter-over-quarter, compared to just 20% in the first quarter of the year. Margin improvement was less prevalent for the biggest banks as only 32% of banks with assets over $100 billion reported net interest margin expansion in 2Q24, and the group as a whole reported median net interest margin compression of 3 bps (see Figure 3 on the next page).
Stock price appreciation was greatest for the banks with total assets between $1 billion and $100 billion, in part reflecting investor optimism for earnings improvement for banks that faced the most margin compression from 4Q22 to 1Q24. ...
Equity Capital Raises
The banking zeitgeist is evolving: 2023 was about a liquidity crisis that claimed three banks who were members of the S&P 500; 2024 is shaping up as the year of capital raises by a handful of regionals to deal with the aftermath of the Fed’s ultra-low-rate environment.
KeyCorp (NYSE:KEY) was the latest bank to raise capital. The Bank of Nova Scotia (TSX:BNS) will purchase ~163 million newly issued common shares in a two-step transaction that once consummated will result in Scotia owning 14.9% of the common shares.
The $17.17 per share issue price equates to:
15% premium to the ten-day volume weighted average price through August 9;
~1.50x pro forma tangible book value; and
10.8x consensus 2025 EPS estimate.
The market was surprised by the investment because KEY’s and KeyBank’s common equity tier 1 ratios were 10.5% and 12.6% respectively as of June 30, 2024. However, the respective tangible common equity ratios were 5.2% and 6.9% given sizable unrealized losses in the AFS bond portfolio and receive fix/pay variable swaps book. KEY has earmarked about one-half the capital to absorb losses from restructuring the balance sheet.
Unlike the New York Community Bancorp (NYSE:NYCB) and First Foundation (NASDAQ:FFWM) capital raises that occurred at significant discounts to the market and tangible BVPS, KEY’s shares traded up on the announcement. Investors took the investment price as a form of validation of KEY’s credit marks, plus there is the potential for the “strategic minority” investment to become a control position via acquiring the remaining common shares one day. ...
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