DBRS Morningstar Confirms Valley National Bancorp Rating at A (low); Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Valley National Bancorp (Valley or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Valley National Bank (the Bank). The trends for all long-term ratings at the Company and at the Bank remain Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The confirmation of the ratings and Stable trends reflect DBRS Morningstar’s view that recent acquisitions and strong organic loan and deposit growth are in line with the bank’s strategic goals of building and diversifying revenue and funding sources, while maintaining stringent underwriting standards and expanding niche businesses such as technology and venture capital banking, middle market and cannabis banking, which are driving strong low cost commercial deposit growth. Valley has maintained sound capital levels relative to requirements, supported by improving profitability over recent quarters.
The ratings confirmation reflects Valley’s solid regional banking franchise, superior credit culture and sound balance sheet fundamentals. The ratings also consider Valley’s commercial real estate concentration, heavy reliance on spread income (89% of total revenue in 2021), as well as the Company’s expansion into Florida, which has historically been a volatile and highly competitive market.

RATING DRIVERS
We see Valley’s ratings as well-supported by the Company’s current credit profile. Over the longer term, continued progress on profitability metrics combined with less reliance on spread income while maintaining strong underwriting discipline and well-cushioned capital levels would result in an upgrade.

Conversely, a downgrade would result from sustained below-peer profitability levels or a significant deterioration in asset quality or capital levels.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Valley has significant scale in demographically attractive markets, including northern and central New Jersey, Manhattan, Brooklyn, Queens, Long Island and Florida. The Company is a relationship-focused bank that has a stellar loan underwriting track record, allowing it to remain profitable every quarter since its founding in 1927. The Company has grown organically and through acquisitions with total assets crossing the $50 billion mark in 2Q22.

Earnings Combined Building Block (BB) Assessment: Good

Valley’s historically consistent earnings power has been driven by its conservative underwriting and good efficiency levels. Higher interest rates, strong loan growth and gains in fee income are likely to drive earnings expansion over the next several quarters. Valley’s financial performance has shown improvement in recent quarters, especially on an adjusted-basis. The Company generated a return on average assets (ROA) of 1.14% for the full year 2021 and 1.18% on an adjusted basis in 1H22, excluding acquisition charges. Valley’s peer-leading efficiency levels of about 50% are primarily due to its focus on higher-margin commercial lending along with its successful efforts to lower funding costs. Additionally, revenue growth has outpaced expense growth over the last few years, creating positive operating leverage.

Risk Combined Building Block (BB) Assessment: Strong/Good

Valley’s asset quality metrics remain strong, with non-accrual loans representing 0.72% of total loans at the end of 2Q22, and a quarterly net charge-off ratio of 0.02%. Valley’s allowance for credit losses stood at 1.13% at the end of 2Q22, which we consider sufficient, given historical and expected loss rates. DBRS Morningstar’s concerns around Valley’s high concentration of commercial real estate (53% of total loans) are largely mitigated by the Company’s strong track record and conservative underwriting, which typically requires significant equity from borrowers.

Funding and Liquidity Combined Building Block (BB) Assessment: Good

Valley’s funding and liquidity profile remains on an improving trend. Deposit growth continues to be strong, reflecting both organic growth and acquisitions. The Company’s deposit mix has demonstrated sustained improvement, with the continued runoff of time deposits being replaced with non-interest and lower-cost transaction balances. Recently acquired deposits exceeded acquired loans, increasing funding stability and further reducing funding costs. Valley expects that deposits will have a slower repricing cycle, as rates rise due to increased commercial transaction balances that are stickier.

Capitalization Combined Building Block (BB) Assessment: Good

DBRS Morningstar views Valley’s capitalization as sound, given the Company’s strong track record of managing credit risk. Capital levels have recently decreased towards the lower end of peer ranges for the ratings level. However, Valley continues to hold a solid capital cushion over required levels. This supports the Company's ability to absorb higher credit costs and is a counterweight to the increasingly uncertain outlook.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/401749.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organizations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.