KBRA Affirms Ratings for Valley National Bancorp

KBRA 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 (+450% 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; this ratio has been maintained below 0.2% since 2014. Additionally, the company’s exposure to rent regulated multi-family was moderate as of 1Q24, with around $500 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. 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 0.7% in 1Q24, driven by NIM compression related to funding pressures, modestly higher credit costs (0.3% of average assets in 1Q24) and limited fee-based revenues (~0.4% of average assets). However, while deposit costs were elevated (3.16% total cost of deposits for 1Q24), 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 near 9%. That said, the company has committed to management of higher capital ratios, including a CET1 ratio near 10% by YE24. 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.

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