Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS) has said it will sell 140 million shares in its US banking unit Citizens Financial Group Inc in the price range of $23 – $25 per share.
Company executives are now in the midst of a two-week roadshow to help build interest in the IPO, which is expected to raise about $3.5 billion and has the potential to be the biggest new floatation from a bank over the last five years.
At the higher end of the pricing, Citizens could earn a valuation of $14 billion. Providence, R.I. based Citizens has 1,370 branches, over 18,000 employees and approximately $122 billion in assets. It ranks as the 13th largest retail bank in the US.
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Is action picking up in Bank IPOs and M&A?
Last week BB&T Corporation (NYSE:BBT), and The Bank of Kentucky Financial Corp (NASDAQ:BKYF) announced their merger in a cash and stock transaction for a total consideration valued at approximately $363 million. The deal enhances BBT’s ranking in Kentucky to No 2.
“Industry capital levels and tepid pace of the economic recovery would suggest a lift in M&A; however, the increase in public valuations has pushed a growing number of privately held banks to seek capital from new shareholders vs. being acquired,” say analysts at Sterne Agee in their ‘Bank Examiner’ report of September 11.
Meanwhile, higher market valuations have nevertheless helped increase the number of banks taking the IPO route to raise funds.
There appears to be a distinct uptick in the number of public issues in 2014. Till the date of the report, there have been 8 bank IPOs during 2014, double of the number in 2013 (4 issues) and that in 2012 (also 4); funds garnered from the issues aggregated $838 million in 2014 compared to $294 million in 2013.
On an annualized basis the three best performing IPOs during the period 2012-2014 (till date) were:
Independent Bank Group Inc (NASDAQ:IBTX) +90%
EverBank Financial Corp (NYSE:EVER) +89%
First NBC Bank Holding Company (NASDAQ:NBCB) +40%
What drove these stellar performances?
“Simply put, margin of safety from a valuation perspective helps, but investors ultimately reward those operators that post improving growth and profitability with a higher valuation,” say Sterne Agee analysts Peyton Green and his team, noting that out of the 16 issues during 2012-2014, six have notched up double digit gains since their issue.
The following were the three IPOs with the poorest returns in the same period:
ConnectOne Bancorp Inc (NASDAQ:CNOB) -32%
HomeStreet Inc (NASDAQ:HMST) -19%
Tristate Capital Holdings Inc (NASDAQ:TSC) -17%
As shown in the chart below, M&A activity is also on the rise after falling to a low in 2008-2010.
“Activity in general has picked up as 191(287 annualized) bank deals have been announced in YTD14,” observes Sterne Agee. “This compares to 246 in 2013, 244 in 2012 and 175 in 2011.”
In terms of valuations, the core deposit premia paid in the deals have also shown a rising tendency. (Core deposit premium: The amount paid in excess of the core deposits held on the books of an acquired institution).
“We see that takeout valuations have steadily improved since 2011 as the P/TBV has increased to 1.37x in 2014 vs. 1.05x in 2011 and the core deposit premium has increased to 4.1% in 2014 vs. 0.3% in 2011,” says the Bank Examiner.
However, the report observes that deal valuations are fairly subdued compared to their heydays in 1994-98 and 2003-2007 when deals were done at P/TBV ratios in excess of 2x, and ascribes the reason to “relatively weaker credit quality and profitability of sellers.”