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

DBRS, Inc. (DBRS) 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 confirmed the ratings of its primary banking subsidiary, Valley National Bank (the Bank), as well as discontinued and withdrew Valley’s Subordinated Debt and Preferred Stock ratings, and the Bank’s Subordinated Debt rating. The trend for all ratings remains 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. The ratings action follows the Company’s announcement to acquire Washington Township, N.J.-based Oritani Financial Corp. (Oritani) in an all-stock transaction valued at $740 million. Subject to approvals from regulators and other customary approvals, the transaction is expected to close in 4Q19.

KEY RATING CONSIDERATIONS
DBRS views the acquisition as a good strategic fit, with attractive terms and expects that Valley will deliver on the assumptions of the transaction. Additionally, Valley has a proven track record of acquiring and successfully integrating acquisitions.

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.

The ratings also consider Valley’s commercial real estate concentration, its below-peer, albeit improving profitability metrics and heavy reliance on spread income (87% of operating revenue in 2018), as well as the Company’s recent expansion into Florida, which has historically been a volatile market.

RATING DRIVERS
Given DBRS’s view that Valley is in the lower end of its rating category, DBRS does not anticipate positive rating actions over the intermediate term. Over the longer term, improved earnings and less reliance on spread income, 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.

RATING RATIONALE
The proposed merger will enhance Valley’s presence in its legacy markets, with a 100% branch overlap within three miles. Excluding expense synergies due to branch closures, the transaction is expected to achieve 50% costs savings and more than 350 basis points of efficiency ratio improvement. Upon closing, Valley plans to restructure approximately $635 million of higher cost FHLB borrowings, resulting in more than 50 basis points of CET1 ratio improvement, which stood at 8.5% at the end of 1Q19.

While the combination will increase Valley’s already high commercial real estate concentration, DBRS considers such concerns to be largely mitigated by the Company’s long track record of conservative underwriting and a strong corporate risk culture.

Founded in 1911, Oritani had $4.1 billion of total assets, $3.5 billion of total loans and $2.9 billion of deposits at the end of 1Q19. Oritani has 26 branches in New Jersey, 18 of which are located in Bergen County, N.J., a demographically attractive county, with the balance covering Passaic, Essex and Hudson County. Upon closing, Valley will be able to introduce a broader product set to Oritani customers.

DBRS notes that Valley’s credit fundamentals remain sound with improving profitability metrics and a sound balance sheet. Most recently, Valley generated $74.9 million of adjusted net income in 1Q19, up more than 20% from the prior year quarter.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $32.5 billion in total assets at March 31, 2019.

The Grid Summary Scores for Valley are as follows: Franchise Strength – Strong/Good; Earnings Power –Strong/Good; Risk Profile – Strong; Funding & Liquidity – Good; Capitalisation – Good.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS 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 had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA