KBRA Assigns Preferred Stock Rating and Affirms Existing Ratings to Valley National Bancorp

Rhea-AI Summary

KBRA has assigned and affirmed ratings for Valley National Bancorp (NASDAQ: VLY) and its lead subsidiary, Valley National Bank. Key points include:

1. Preferred stock rating of BBB- assigned to VLY
2. Senior unsecured debt rating of BBB+ affirmed
3. Subordinated debt rating of BBB affirmed
4. Short-term debt rating of K2 affirmed
5. Stable outlook for all long-term ratings

The ratings are supported by VLY's strong credit quality track record and regional diversification. However, challenges include elevated CRE concentration, below-peer earnings, and capital levels. VLY aims to increase its CET1 ratio to 10% by year-end 2024 and reduce CRE concentration below 400% in 1-2 years.

Positive

• Long-term track record of strong credit quality performance
• Regional diversification with significant presence in Southeast ($10 billion in deposits from Florida and Alabama)
• Robust retail deposit operation complemented by durable specialty deposit business lines
• Commitment to increase CET1 ratio to 10% by year-end 2024
• Plan to reduce CRE concentration below 400% in 1-2 years

Negative

• Elevated CRE concentration at 440% of risk-based capital
• Increase in total criticized/classified loans to over 5% of total loans in Q2 2024
• Operating ROA fallen to 0.6% in 1H 2024 due to NIM compression and higher credit costs
• fee-based revenues at ~0.4% of average assets
• Below peer capital levels with CET1 ratio between 9% - 9.5%

Insights

Financial Analyst

As a financial analyst inspired by the straightforward style of Malcolm Gladwell, I find Valley National Bancorp's (VLY) rating affirmation by KBRA to be a mixed bag of positives and cautionary notes. Let's break it down:

Strengths:

• VLY's long-term track record in credit quality performance is commendable, especially considering their outperformance during the Global Financial Crisis with a peak NCO ratio of only 0.5% in 2011.
• The bank's regional diversification, with a significant presence in the Southeast ($10 billion in deposits from Florida and Alabama), complements its traditional New York/New Jersey markets nicely.
• VLY's retail deposit operation has shown resilience, with no material deposit runoff following the bank failures in Q1 2023.

Challenges:

• The elevated concentration in Commercial Real Estate (CRE) at 440% of risk-based capital is a concern, though the exposure to NYC rent-regulated multi-family and office space appears manageable.
• Credit migration is evident, with criticized/classified loans increasing to over 5% of total loans in Q2 2024.
• Earnings have consistently underperformed peer averages, with operating ROA falling to 0.6% in H1 2024.
• Capital levels are below peer averages, with the CET1 ratio hovering between 9% and 9.5%.

The bank's commitment to raising its CET1 ratio to 10% by year-end 2024 and reducing CRE concentration below 400% in the next 1-2 years are positive steps. However, investors should closely monitor VLY's progress in managing these challenges, particularly in light of the competitive deposit environment and potential credit quality pressures.

Risk Management Expert

Channeling the analytical prowess of Nate Silver, I'd like to focus on the risk factors and mitigation strategies evident in KBRA's rating of Valley National Bancorp (VLY). The bank's risk profile presents a nuanced picture:

Risk Factors:

• CRE Concentration: At 440% of risk-based capital, this is significantly above regulatory guidance of 300%, potentially increasing vulnerability to market downturns.
• Credit Migration: The increase in criticized/classified loans to over 5% of total loans signals potential deterioration in credit quality.
• Capital Adequacy: Below-peer capital levels could limit the bank's ability to absorb unexpected losses.
• NIM Compression: Funding pressures are squeezing margins, impacting profitability.

Mitigating Factors:

• Historical Performance: VLY's track record through various credit cycles, including the GFC, demonstrates resilience.
• Portfolio Composition: Moderate exposure to NYC rent-regulated multi-family (1% of total loans) and manageable office exposure (7% of total loans) mitigate some CRE risks.
• Deposit Base: A robust retail deposit operation and specialty deposit business lines have shown stability.
• Strategic Initiatives: Plans to increase the CET1 ratio to 10% and reduce CRE concentration below 400% indicate proactive risk management.

While VLY faces challenges, its risk management strategies appear sound. The key will be execution, particularly in improving capital ratios and managing CRE exposure. Investors should monitor these metrics closely, as successful implementation could enhance VLY's risk profile and potentially lead to positive rating actions in the future.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns a preferred stock rating of BBB-, as well as affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Morristown, New Jersey based Valley National Bancorp (NASDAQ: VLY) (“the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for lead subsidiary, Valley National Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by VLY’s long term track record with regard to credit quality performance. While KBRA recognizes certain risks within the company's current loan portfolio, more specifically, an elevated concentration in CRE (+440% of risk-based capital), VLY has historically outperformed the industry through various credit cycles, including the GFC when VLY’s NCO ratio peaked at 0.5% in 2011. With regards to VLY's CRE concentration, the company’s exposure to NYC rent regulated multi-family was moderate as of 1Q24, with around $600 million (~1% of total loans) in loans for properties that had more than 50% in rent regulated units, while office exposure was rather manageable at 7% of total loans. While VLY has experienced some credit migration within the loan portfolio with total criticized/classified loans increasing to over 5% of total loans at 2Q24, this is partially due to recent changes in the company's views towards certain risk mitigation factors that resulted in credit downgrades in 2Q24. Furthermore, KBRA has a favorable view of the company’s regional diversification with its meaningful presence in the Southeast (VLY had nearly $10 billion in deposits from its Florida and Alabama markets), complementing its legacy markets in the New York/New Jersey region.

Earnings have consistently tracked below rated peer averages, including an operating ROA that has fallen to 0.6% in 1H24, driven by NIM compression related to funding pressures, modestly higher credit costs (0.4% of average assets in 1H24) and limited fee-based revenues (~0.4% of average assets). However, while deposit costs were elevated (3.18% total cost of deposits for 2Q24), in part, due to the competitive dynamics in regions where the company operates in (namely New York/New Jersey), VLY maintained a rather robust retail deposit operation, complemented by various specialty deposit business lines that have proven to be comparatively durable with no material deposit runoff incurred following the highly publicized bank failures in 1Q23. VLY has consistently maintained below peer capital levels, including a CET1 ratio that has recently tracked between 9% - 9.5%. That said, the company has committed to management of higher capital ratios, including a CET1 ratio near 10% by YE24 (VLY reported a CET1 ratio of 9.6% at 2Q24). Moreover, the company has de-emphasized CRE loan growth, which, coupled with management of higher capital, is intended to reduce its CRE concentration levels to below 400% over the next 1 – 2 years.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a rating change is unlikely in the medium term. However, deterioration in asset quality with credit costs tracking above expectations, coupled with continued earnings headwinds that lead to diminished profitability, or a measurable increase in wholesale funding usage brought on by unexpected deposit runoff could result in negative rating action.

To access rating and relevant documents, click here.

Methodologies

• Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1005280

View source version on businesswire.com: https://www.businesswire.com/news/home/20240729751189/en/

Analytical Contacts

Jason Szelc, Senior Director (Lead Analyst)

+1 301-969-3174

jason.szelc@kbra.com

Ian Jaffe, Senior Managing Director

+1 646-731-3302

ian.jaffe@kbra.com

Joe Scott, Senior Managing Director (Rating Committee Chair)

+1 646-731-2438

joe.scott@kbra.com

Business Development Contact

Justin Fuller, Managing Director

+1 312-680-4163

justin.fuller@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What is Valley National Bancorp's (VLY) preferred stock rating assigned by KBRA?

KBRA assigned a preferred stock rating of BBB- to Valley National Bancorp (VLY).

What is the outlook for Valley National Bancorp's (VLY) long-term ratings?

KBRA has assigned a Stable outlook for all long-term ratings of Valley National Bancorp (VLY).

What is Valley National Bancorp's (VLY) CRE concentration as of the latest report?

Valley National Bancorp (VLY) has an elevated CRE concentration of 440% of risk-based capital.

What is Valley National Bancorp's (VLY) target CET1 ratio by year-end 2024?

Valley National Bancorp (VLY) aims to increase its CET1 ratio to 10% by year-end 2024.

What was Valley National Bancorp's (VLY) operating ROA in the first half of 2024?

Valley National Bancorp's (VLY) operating ROA fell to 0.6% in the first half of 2024.