DBRS Morningstar Confirms Valley National Bancorp at A (low); Trend Revised to Negative

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). Additionally, DBRS Morningstar assigned a Subordinated Debt rating of BBB (high) to the Company, a Subordinated Debt rating of A (low) to the Bank and a Preferred Stock rating of BBB (low) to the Company. The trend for all long-term ratings at the Company and at the Bank were revised to Negative from 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 Negative trend reflects the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which pressured Valley’s earnings in 1Q20 and may negatively impact earnings and asset quality in future quarters. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure may occur.

The confirmation of Valley’s ratings reflects its solid regional banking franchise, superior credit culture and sound balance sheet fundamentals. The ratings also consider Valley’s commercial real estate concentration, its below-peer profitability metrics and heavy reliance on spread income (87% of operating revenue in 2019), as well as the Company’s continued expansion into Florida, which has historically been a volatile and highly competitive market.

RATING DRIVERS
Given the Negative trend, an upgrade of the ratings is not currently anticipated. However, DBRS Morningstar could revise the trend back to Stable if the economic fallout from the coronavirus pandemic is not prolonged and outsized credit losses do not materialize. Conversely, a continued decline in profitability levels or meaningful deterioration in asset quality would result in a ratings downgrade.

RATING RATIONALE
Valley’s ratings are underpinned by its proven superior credit culture that has allowed the Company to remain profitable every quarter since its founding in 1927. The ratings also reflect Valley’s solid deposit franchise in demographically attractive areas of northern and central New Jersey, Manhattan, Brooklyn, Queens, Long Island and Florida.

Valley’s financial performance remains weaker than similarly-rated peers. For 2019, the Company generated a return on assets (ROA) 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. In 1Q20, Valley reported similar bottom line results (ROA of 0.92%), as higher income before provisions and taxes largely offset a substantial loan loss reserve build. The reserve build reflected the economic outlook, adoption of CECL and loan growth. Valley’s allowance for credit losses represented 0.96% of total loans at the end of 1Q20, up considerably from 0.55% at YE19.

Valley’s asset quality has been pristine entering the current downturn, with a net charge-off ratio of six basis points in 1Q20. While the Company has a high concentration of commercial real estate (60% of total loans), DBRS Morningstar’s concentration concerns are somewhat mitigated, considering Valley’s prudent underwriting, which typically requires significant equity from borrowers and has been a hallmark of the Company for a very long time.

Despite being somewhat lower than peers, DBRS Morningstar considers Valley’s capital ratios to be sound, given its strong track record of managing credit risk. The Company reported a CET1 ratio of 9.2% at the end of 1Q20. DBRS Morningstar views Valley’s funding and liquidity profile as good, with additional opportunities to further lower liability costs going forward.

Valley National Bancorp, headquartered in New York, New York, had $39.1 billion in total assets at March 31, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019): https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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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