Now that the debate is turning from Fed tightening to when the Fed will start dropping rates, we took a look at how financial institutions fared during the tightening cycle, using the quarter ended December 31, 2021 as the base period. The Fed began tightening at its March 17, 2022 meeting with a 25 basis points increase in the Fed Funds Rate and ended July 26, 2023.
Before providing observations, here are some relevant ratios that I reviewed for all U.S. banks and savings banks (not S&Ls), amounting to over 4,000 institutions, and divided them up into asset size cohorts.
Back then, price-to-tangible book multiples were nearly equal for $5B-$10B banks and the largest banks. Not today. And the highest p/e multiples at this January 9th cut were in the $10B-$50B cut. Bank valuations are wonky at this writing and it is difficult to make any conclusions. But if you have enough trading volume to allow investors to get in and out without moving the market, you would be at an advantage from those that have little liquidity. Individual investors continue to yield ground to institutional investors and those funds need to be able to exit. And if sale is the only way they can exit, then consolidation is sure to pick up.
Those are my observations. I would enjoy hearing yours.