DBRS Confirms VLY at A (low) Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings for Valley National Bancorp (Valley or the Company), including the Company’s Issuer & Senior Debt rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Valley National Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

Valley’s ratings are underpinned by its superior credit culture, which has resulted in significantly lower-than-peer loan losses over the long-term, allowing the Company to remain profitable every quarter since its founding in 1927. The ratings also reflect the demographically attractive markets in which the Company operates, including northern and central New Jersey, Manhattan, Brooklyn, Queens, Long Island and Florida. In addition, the ratings also consider Valley’s commercial real estate concentration, its below-peer, although improving profitability metrics and heavy reliance on spread income (86% of operating revenue in 2016), as well as the Company’s recent expansion into Florida, which has historically been a volatile market. Overall, DBRS views Valley as being in the lower end of its rating category.

During 2016, Valley’s earnings significantly improved compared to the prior year, as the Company fully recognized the $20 million in annual cost saves related to efficiency initiatives announced in October 2015, which included branch rationalization and the utilization of technology to enhance and streamline operations and delivery channels. More recently, Valley’s 1Q17 performance reflected further momentum, benefiting from solid loan growth, higher interest rates and disciplined expense management, which resulted in a reported return on assets of 0.80% (up 13 basis points versus 1Q16). The Company remains keenly focused on further improving its operational efficiency. Valley hired a well-regarded external consultant and announced a new efficiency initiative called “LIFT” in December 2016, which aims to identify additional areas of operating expense reductions and revenue enhancement opportunities. The implementation stage is expected to begin in the second half of the year, with the majority of benefits expected to be captured in 2018.

Importantly, Valley’s asset quality remains pristine, with non-accrual loans representing just 0.22% of total loans and the net charge-off ratio standing at 0.03% as of 1Q17. Moreover, DBRS notes that Valley’s high concentration of commercial real estate (56% of total loans as of 1Q17) is mitigated by the Company’s conservative underwriting standards, which typically require significant equity from borrowers. DBRS views the Company’s allowance for loan losses (0.66% as of 1Q17) as sufficient considering Valley’s very low loan loss history.

The Company’s capital ratios, despite being somewhat lower than peers, remain solid from DBRS’s perspective, given Valley’s strong track record of managing credit risk. DBRS notes that the Company issued $107 million of common equity in December 2016 to support loan growth. Finally, Valley’s funding and liquidity profile improved modestly over the past year, benefiting from the modification of FHLB borrowings coupled with the repayment of some high cost debt.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $23.2 billion in total assets at March 31, 2017.

RATING DRIVERS
In the intermediate term, ratings are unlikely to trend upward given recent expansion in Florida, which is a more volatile market. Longer term, improved earnings and less reliance on spread income, as well as strong execution within Florida, could have positive rating ramifications. Conversely, negative ratings pressure could result from continued below-peer profitability metrics or a significant deterioration in the Company’s superior risk profile.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2017), and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President – Global Credit Policy
Initial Rating Date: 5 October 2009
Most Recent Rating Update: 27 May 2016

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