Morningstar DBRS Confirms Valley National Bancorp’s Long-Term Issuer Rating at A (low); Trend Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Valley National Bancorp (Valley or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Valley National Bank (the Bank). The trends for all credit ratings remain 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 CREDIT RATING CONSIDERATIONS

Valley’s credit ratings reflect the Company’s solid banking franchise, resilient earnings generation capacity, and solid balance sheet fundamentals, including sound asset quality that is underpinned by strong client relationships and a conservative credit culture. The Company’s geographic footprint includes a sizeable presence in the northeast including New Jersey and New York, as well as a solid presence in Florida. The credit ratings also consider Valley’s limited fee-income contribution to revenues making it reliant on spread income. Although Valley’s credit profile is solid and reflects sound credit metrics, the Company does have substantial exposures to commercial real estate (CRE), which when combined with its construction loan portfolio, aggregates to approximately 55% (excluding owner occupied CRE) of total loans

The Stable trend reflects our view that the Company’s credit fundamentals will remain solid, despite likely higher for longer interest rates, the inverted yield curve, and headwinds related to office and rent-regulated CRE exposures.

CREDIT RATING DRIVERS
Over the longer term, sustained improvement in profitability metrics including a lower reliance on spread income while improving the funding profile by attracting lower cost core deposits, would result in a credit ratings upgrade. Conversely, a credit ratings downgrade would result from sustained below-peer profitability levels, a significant deterioration in credit quality, or an inability to maintain funding at a reasonable cost.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Valley, established in 1927, is a relationship-focused banking franchise with a substantial geographic footprint including the demographically appealing markets of northern and central New Jersey, Manhattan, Brooklyn, Queens, Long Island, Florida and Alabama. The Company has grown through both acquisitions and organic means and reported $61.0 billion in assets, as of March 31, 2024.

Earnings Combined Building Block (BB) Assessment: Good
The Company’s earnings generation capacity has been resilient throughout the years reflecting solid loan growth and a strong credit culture which has translated into manageable credit costs. Despite pressure from the current inverted yield curve and inflation, Valley’s bottom line remains resilient. For 2023, net income declined to $498.5 million, representing a return on average assets (ROAA) of 0.82% (Company calculated) and return on average equity (ROAE) ratio of 7.60%, driven primarily by higher expenses and net interest margin compression. Most recently in 1Q24, Valley reported earnings of $96.3 million, representing 0.63% of average assets (ROAA: Company calculated) and 5.7% of (ROAE) that also included a FDIC insurance charge, similar to other banks. Looking forward, the Company expects loan growth to somewhat moderate as it manages its CRE concentration and transitions towards a higher level of C&I loans.

Risk Combined Building Block (BB) Assessment: Strong/Good
Reflective of its conservative credit culture, the Company’s risk profile remains sound. In 1Q24, annualized net charge-offs (NCOs) totaled a very manageable 19 basis points (bps), down from 25 bps in 1Q23. NCOs mostly reflected C&I loans ,and to a lesser extent, construction and CRE exposures. Overall, Valley’s allowance for credit losses totaled 94 bps of gross loans at March 31, 2024, which we consider as appropriate, given Valley’s historical and expected loss rates. Overall, we view the Company’s high concentration of CRE as somewhat moderated by its strong credit track record and conservative underwriting including significant equity from borrowers, granularity of exposures, and sound LTVs and debt service coverage ratios.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
The Company’s funding is underpinned by a good sized deposit base, of which 77% is FDIC-insured. Deposits in 1Q24 moderately contracted reflecting lower levels of time and non-interest bearing deposits, partially offset by increasing levels of savings. NOW, and money markets.

The Company maintains a moderately sized securities portfolio which aggregates to $5.2 billion, or 8.6% of total assets, at March 31, 2024. The portfolio primarily consists of high quality UST, agency MBS, and some municipal and corporate exposure, providing a quality collateral base to support liquidity needs.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
With its resilient earnings generation capacity and modest credit costs, we view the Company’s capitalization as acceptable. At March 31, 2024, Valley’s CET1 ratio was 9.34%, improved from 9.29% at December 31, 2023 and up from 9.02% at March 31, 2023. We anticipate that Valley will continue to maintain sound capital levels. The Company noted that it expects their CET1 ratio to increase to better than 10% within 12 – 24 months.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/434065.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881/global-methodology-for-rating-banks-and-banking-organisations. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’s outlooks and credit ratings are under regular surveillance.

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

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