One of the cheapest areas of the market for a while now has been the banking sector. In the face of economic uncertainty and elevated loan losses, normalized bank valuation metrics have (temporarily, I believe) gone out the window. As a result, many of the stocks (even some quality names) languish near or below book value and despite this, very few non-FDIC assisted deals have been announced. However, today we got a rather sizable bank deal. First Niagara (FNFG) has agreed to acquire NewAlliance (NAL) for $14.06 per share in stock, or about $1.5 billion. This represents a 24% premium, and most importantly for value investors, amounts to 1.63 times tangible book value per share. Banks typically sell for 2-3 times book in normal times, or 1.5-2.0 times tangible book (excluding goodwill and intangible assets), so this transaction shows us that normal bank metrics are not dead.
Interestingly, I had never heard of First Niagara until early last year when they agreed to buy dozens of branches from PNC Financial (PNC) as part of PNC’s purchase of troubled National City. PNC remains one of my favorite bank stocks (and the big local bank here in Pittsburgh) but First Niagara has remained in strong financial shape throughout the crisis and is certainly using that strength to expand while other competitors are retrenching (a smart move on their part). This NewAlliance deal gives them a footprint in New England, and like the PNC branch deal, likely bodes well for their future.
The takeaway for me is that, no, I have not lost my mind. Solid banking institutions selling at or below book value does make little sense. The odds of heightened takeover activity are slim with 9.5% unemployment, but over the longer term I fully expect bank valuation to rise back to more historical levels, for quality franchises anyway. Opportunities abound.
Full Disclosure: Long PNC and no position in FNFG or NAL at the time of writing, but positions may change at any time.