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 ratings 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 ratings confirmation reflects Valley’s solid regional banking franchise that has been profitable each quarter since inception, superior credit culture and sound balance sheet fundamentals. The ratings also consider Valley’s significant commercial real estate concentration at 63% of loans when owner-occupied and construction are included, heavy reliance on spread income (89.5% of total revenue in 2022), as well as the Company’s expansion into Florida, which has historically been a volatile and competitive market. Valley has maintained sound capital levels relative to requirements, supported by improving profitability over recent quarters. In 2022, Valley closed the acquisition of Bank Leumi USA, which added about $9 billion in assets and $7 billion in deposits while diversifying revenues through fee income in Wealth Management, foreign exchange, and Trust.
The Stable trend reflects 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 and middle market and cannabis banking. While we do expect pressure in the CRE portfolio, Valley has very sound LTVs and debt service coverage ratios partially mitigating this concern.

RATING DRIVERS
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Over the longer term, continued progress improving profitability metrics, including a lower reliance on spread income while improving the funding profile by attracting lower cost core deposits would result in a ratings upgrade. Conversely, a downgrade would result from sustained below-peer profitability levels, a significant deterioration in asset quality, or an inability to maintain funding at a reasonable cost.

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 and is presently at $64 billion as of March 31, 2023.

Earnings Combined Building Block (BB) Assessment: Good

Valley’s historically consistent earnings power has been driven by its conservative underwriting and good efficiency levels with efficiency currently higher than trend at 53.8%, which still compares favourably. Higher interest rates, strong loan growth and gains in fee income are likely to drive revenue growth over the next several quarters. In addition, Valley expects the excess liquidity taken on in 1Q23 will decrease, with FHLB borrowings running off, which should ease pressure on funding costs. Valley’s financial performance has shown improvement in recent quarters through 2022, especially on an adjusted-basis. The Company generated a return on average assets (ROA) of 1.25% (adjusted) for the full year 2022, 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 with much of its specialized non-interest bearing deposits in commercial niche sectors such as cannabis and technology. 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 1Q23 non-accrual loans representing 0.50% of total loans, down from the peak of 0.72% at the end of 2Q22. Net charge-offs (NCOs) have trended up recently but remain very manageable at 25 basis points of average loans 1Q23. Overall, Valley’s allowance for credit losses stood at 0.95% at the end of 1Q23, which we consider sufficient, given historical and expected loss rates. DBRS Morningstar’s concerns around Valley’s high concentration of commercial real estate (63% of total loans) are partially 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 benefits from a sound deposit base, of which a high 69% are FDIC-insured. Deposit growth was strong through 2022 benefiting from an acquisition. Following the three commercial bank failures earlier this year, Valley prudently took steps to stabilize funding during this volatile period by building excess liquidity through brokered deposits and FHLB advances, as well as transitioning client deposits into higher yielding products. As market fears dissipate, Valley expects to reduce its excess liquidity position, which should lessen net interest margin pressure.

Valley’s $5.1 billion securities portfolio is relatively small, (8% of total assets) with mainly high quality UST, agency MBS, and some municipal and corporate exposure, leaving it with a good quality base to use as collateral with the Federal Reserve, and substantial room to return to higher borrowing levels as needed.

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. At March 31, 2023, Valley’s CET1 ratio was 9.02% giving it 202 basis point cushion over regulatory requirements. We expect Valley to continue their historical policy of conservative capital levels and maintaining credit strength while their profitability supports growth and opportunistic M&A.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415683

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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings—Request for Comment | DBRS Morningstar.

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 – Request for Comment (May 19, 2023): DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings—Request for Comment | DBRS Morningstar.

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

The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

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.

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