DBRS Confirms VLY 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). 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 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 2017), 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, 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.

RATING RATIONALE
For 2017, Valley’s profitability metrics, including an adjusted return on assets (ROA) of just over 80 basis points, remained at the low end of its peer group. Results included substantial technology investments, the impact from Project LIFT (the Company’s efficiency initiative) and merger-related expenses, partially offset by improved net interest income, which benefited from modest loan growth and higher short-term interest rates.

More recently, Valley’s performance during the first six months of 2018 demonstrated continued improvement (adjusted ROA of 0.93%), benefiting from higher loans balances related to the acquisition of USAmeriBancorp, Inc. (USAB, completed on 1/1/18) and organic loan growth, as well as higher interest rates and a lower tax rate.

Importantly, Valley’s asset quality remains pristine, with non-accrual loans representing just 0.36% of total loans at the end of 2Q18, and the quarterly net charge-off ratio standing at 0.01%. Moreover, DBRS notes that Valley’s high concentration of commercial real estate (57% of total loans as of 2Q18) 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 (0.62% as of 2Q18) as sufficient considering Valley’s very low loan loss history.

The Company’s capital ratios, despite being somewhat lower than peers, remain sound from DBRS’s perspective, given Valley’s strong track record of managing credit risk. DBRS notes that the Company issued $737 million of common equity during 1H18 to finance the USAB acquisition. During 2Q18, Valley’s deposits declined modestly linked-quarter, reflecting strong market competition and seasonally lower municipal and escrow balances. Beyond staying competitive with deposit pricing, Valley’s longer-term strategy remains focused primarily on improving its digital capabilities to capture more market share.

Valley National Bancorp, a commercial bank headquartered in Wayne, New Jersey, had $30.2 billion in total assets at June 30, 2018.

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 (July 2018), 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: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 5 October 2009
Last Rating Date: 26 July 2017

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.