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

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 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 SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
Valley’s ratings are underpinned by its superior credit culture, which has historically resulted in significantly lower-than-peer loan losses, 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, Florida and Alabama.

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 2019), as well as the Company’s expansion into Florida, which has historically been a volatile and highly competitive market.

RATING DRIVERS
DBRS Morningstar views Valley as being in the lower end of its rating category. Over the longer term, improved profitability 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
In 2019, Valley demonstrated continued progress with its strategic priorities, while expanding its franchise with the acquisition of Bergen County, NJ-based Oritani Financial Corp. (completed in December 2019), a bank holding company with $4 billion in total assets, in an all-stock transaction valued at $740 million. DBRS Morningstar views the acquisition as a good strategic fit, with attractive terms.

Specifically, the acquisition enhanced 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. Additionally, the transaction was accretive to capital and was the primary driver behind roughly 100 basis points of improvement in the Company’s CET1 ratio (9.4% at YE19).

While improving, Valley’s financial performance remains weaker than similarly-rated peers. For 2019, the Company generated a return on assets of 0.93%, with strong commercial real estate loan growth driving improved net interest income, alleviating net interest margin pressure. Excluding merger-related items, core operating expenses continue to decline, benefiting from its branch rationalization initiative, as well as cost savings from other recent acquisitions. Management stated that the Company remains on track to reach its targeted adjusted efficiency ratio of 51% during 2020.

Valley continues to be opportunistic in managing its liability costs, including extinguishing $635 million of FHLB debt associated with the Oritani transaction in 4Q19, which will help lower interest expense going forward. DBRS Morningstar considers Valley’s funding and liquidity profile as good and should modestly improve, with additional opportunities to further lower liability costs going forward.

Valley’s prudent underwriting, which typically requires significant equity from borrowers, and resulting pristine asset quality have been a hallmark of the Company for a very long time, providing key support to the ratings, including mitigating concerns about Valley’s high concentration of commercial real estate (59% of total loans at YE19). Valley’s 2019 net charge-off ratio was a very low six basis points. Given Valley’s superior loan loss history, DBRS Morningstar considers the Company’s capital ratios to be sound, despite being somewhat lower than peers and the expectation that they will gradually migrate lower toward pre-deal levels.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $37.5 billion in total assets at December 31, 2019.

The Grid Summary Grades 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 principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents, and S&P Global Market Intelligence. 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 did not have 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.

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