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

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 long-term ratings at the Company and at the Bank were revised to Stable from Negative. 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 revised trend to Stable reflects DBRS Morningstar’s view that that the economic impact from the Coronavirus Disease (COVID-19) pandemic on Valley’s asset quality and capital will continue to be manageable. The ratings confirmation reflects Valley’s solid regional banking franchise, superior credit culture and sound balance sheet fundamentals. The ratings also consider Valley’s commercial real estate concentration, heavy reliance on spread income (86% of total revenue in 2020), as well as the Company’s expansion into Florida, which has historically been a volatile and highly competitive market.

RATING DRIVERS
We see Valley’s ratings as appropriately placed. Over the longer term, top-tier profitability metrics and less reliance on spread income would result in an upgrade. Conversely, a downgrade would result from sustained below-peer profitability levels or a significant deterioration in asset quality.

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.

Earnings Combined Building Block (BB) Assessment: Good

Despite the challenging operating environment, Valley’s financial performance continues to improve. The Company generated a return on average assets (ROA) of 0.96% for the full year 2020 and 1.15% in 1H21. Results benefited from the Company’s ongoing funding mix optimization and Paycheck Protection Program (PPP) loan growth, which more than offset operating expense growth, as Valley continues to invest in the franchise. Moreover, the Company’s efficiency ratio continues to be among the best of the peer group at approximately 50%.

Risk Combined Building Block (BB) Assessment: Strong/Good

Valley’s asset quality metrics remain strong, with non-accrual loans representing 0.68% of total loans at the end of 2Q21, and a quarterly net charge-off ratio of 0.11%. The Company has identified $2.1 billion, or 6.8% of total loans, to borrowers within higher risk COVID-19 industries, of which there were no active deferrals, with 86% pass-rated under the Company’s internal risk ratings. Valley’s allowance for credit losses stood at 1.09% at the end of 2Q21, which we consider sufficient, given historical and expected loss rates. DBRS Morningstar’s concerns around Valley’s high concentration of commercial real estate (59% of total loans) are largely 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 remains solid. Consistent with industry trends, deposit growth continues to be very strong, reflecting high levels of liquidity in the system. The Company’s deposit mix has demonstrated sustained improvement, with the continued runoff of time deposits being replaced with non-interest and lower-cost transaction balances. Valley has also executed on a number of liability management transactions that have lowered the Company’s funding costs.

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. Once considered a ratings constraint, Valley’s capital ratios have improved to the middle of the peer group. At the end of 2Q21, the Company reported a CET1 ratio of 10.0%, which was up more than 50 basis points from the prior year quarter.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/383441.

ESG CONSIDERATIONS
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 https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/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 (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 had 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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