Valley National Bancorp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Valley National Bancorp is a New Jersey-based regional bank providing a wide range of banking, insurance, and wealth management services, primarily across the Northeastern region of the US, along with a digital reach.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Valley National Bancorp (VLY) operates as a diversified financial institution, offering a range of services primarily in the Northeastern region of the United States.

Its revenue streams include traditional banking operations like:

  • Interest income from loans
  • Fee-based income derived from wealth management and insurance services

As a regional bank, VLY is subject to the economic conditions and regulatory landscape of its operating footprint.

  • This is a double-edged sword, since focused on a specific region allows a more concentrated approach but also causes dependence on the regional health.

Historically, the banking industry has been prone to cycles of economic boom and bust, which makes them prone to high volatility.

The company’s performance can be affected by:

  • Interest rate fluctuations, which are a main determinant of its profitability
  • Changes in credit quality, particularly concerning commercial real estate loans
  • Regulatory and compliance costs
  • Competition from larger banks and non-bank financial institutions.

Financials In-Depth

  • Latest Results (Q3 2024):
    • Net income available to common shareholders was $130.8 million or $0.25 per diluted share.
    • Adjusted net income, excluding $32.3 million in non-core items, was $163.1 million or $0.31 per diluted share.
    • While net income was impressive, certain non-interest expenses also increased, such as technology, legal, and employee benefits.
    • Net interest income declined to $411 million in Q3 from $444 million in Q2 due to higher funding costs. Non-interest income saw an increase of $3.7 million from the previous quarter due to strong gains on sales of securities and loan modifications.
    • Total loans and leases increased by $1.4 billion as compared to $1.2 billion in the previous quarter, reaching $50.5 billion.

This indicates a continued growth in lending activity, which however increases their risk at lower interest rates.

    *   Total deposits experienced an increase of $100 million for the quarter, reaching $52.1 billion. While this is an improvement it still has not fully recouped from previous quarters.
     * The quarter faced volatility with rising rates and a challenging yield curve, affecting the cost of funds.  *    **Income Analysis**:
 *   VLY's profit structure is highly susceptible to movements in interest rates and credit conditions
  *  Interest income is the main driver, making the bank’s net interest margin (NIM) a vital metric.
   * As per Q3 2024 the net interest margin was 2.91%, which is a drop from previous quarters. This illustrates the challenge of increasing funding costs amid flat interest income.

Note the importance of managing interest rate and credit risk to maintain the company’s net interest income.

    *  Non-interest income has shown moderate growth, mainly through gains on sales and loan modifications.  *    **Balance Sheet Health Analysis**:
  * Total assets for VLY are at $60.2 billion and total liabilities sit at $54.2 billion. A notable figure to watch is the loan portfolio, which constitutes the bulk of assets (at 49.5 billion) and therefore represents the risk profile of the bank.
      *   The loan composition is diverse, with commercial and industrial loans forming the majority.
   * Credit quality of loans is a main issue for any bank and VLY follows suit in this regard. The allowance for credit losses is 1.14% of total loans (560.5 million). This a big amount which is in place for future losses, but we need to see how this changes in the future as the allowance is directly correlated to the loan book's size.
      * Non-performing loans are at $388.9 million, which is elevated, implying a significant amount of assets that are not performing.
   *  The bank’s total shareholders’ equity was at $5.9 billion. This is down from previous quarters, mostly due to mark-to-market losses in investment securities, which can be a normal phenomenon due to current market rate volatility.

Note that VLY maintains a high level of liquidity and has several forms of liquidity sources, which give a layer of flexibility and cushion in case of distress or unexpected events.

  • Capital Adequacy:
    • VLY maintains a strong capital position. Its CET1 ratio is above regulatory requirements. The bank maintains a common equity Tier 1 to risk-weighted assets ratio of 9.9%, a Tier 1 capital to risk-weighted assets ratio of 11.4%, and a total capital to risk-weighted assets ratio of 12.5%

These ratios prove that VLY is following regulations and is acting responsibly to protect its shareholders and customers.

  • Major Recent Changes and Concerns:

    • Valley National Bancorp has recently completed the acquisition of Bank Leumi USA, integrating its operations, personnel, and assets.
    • This merger has also caused an increase in goodwill (which will be discussed later.)

The merger might bring about operational difficulties, integration costs, and the risk of failing to realize the intended synergies.

   *  Increase in interest rates has negatively impacted the banks net interest margins. Which is not uncommon for regional and other banks who rely on deposits for funding.
   *  The market has been sensitive to fears about higher interest rates impacting loan repayment. This may bring about an increase in loan defaults and therefore higher provisioning.
   * There are some concerns regarding liquidity which has forced banks to increase the cost of deposits, which increases the pressure on the net interest margins.
  * There is also concern regarding the high commercial real estate exposure, but management claims to have a low average LTV on the portfolio.
  • Economic Moat:
    • VLY’s moat is quite weak in most parameters. Regional banks are often constrained with moats and therefore, their ability to generate excess profits over time. * Limited Pricing Power: In the consumer banking space, banks have limited ability to control pricing on their offerings. * There are many options available for consumers who can switch to other banks for better interest rates or lower fees.

With high competition for clients and customers, VLY has very little competitive pricing power, unless there is a large geographical difference.

    *    Low Switching Costs: Switching costs in banking are not very high (depending on the client profile). It's quite easy to move your deposits to other banks, especially when they are offering much higher rates and more perks.
       * Customers might stick to a bank out of convenience and inertia, but not due to high switching costs.
    *   Limited Intangible Assets: VLY is a traditional bank; it does not possess any strong proprietary tech or brand assets that can differentiate them significantly.
        *   They do not have brands as strong as some bigger banks such as JPMorgan or Morgan Stanley, and it is relatively easy for competitors to replicate their offerings.
    *    Lack of Cost Advantages: Being a regional bank, they usually have higher operating expenses relative to larger banks because of the geographical constraints.
        * Scale of operations are important in banking and for this they have to have a large geographical outreach.

  • Moat Rating: 2 / 5 * Given that the company’s structural competitive advantages are limited due to the nature of its business, we give a moat rating of 2. While it might see some periods of profitability, its moat is not strong enough to sustain that in the long term.

  • Understandability:

    • VLY’s operations involve traditional banking and other financial instruments, making it slightly complex. * Evaluating and understanding the financial statements of a bank can be harder than analyzing a normal company.
      • There are many aspects to look at, such as, yield curves, loan-to-deposit ratios, interest rate sensitivity and credit quality.
    • Moreover, for a company with lots of acquisitions, like VLY, this process becomes even more challenging.
      • Therefore, there are a lot of moving components that one should take into account, which adds to its complexity.
    • Understandability Rating: 2 / 5
      • Given these factors, we deem its understandability to be a 2/5

    Balance Sheet Health: * Though VLY’s capital structure is relatively well within regulations, there are areas which need concern. * They have a solid amount of liquidity, but they need to manage their capital well to maintain its current credit rating. * Current elevated levels of NPLs and loan modifications need a close watch to see how they will perform.

    • Overall, with all the factors included, we cannot mark the business as a very strong balance sheet profile, rather it seems to have an average balance sheet.

    • Balance Sheet Health: 3 / 5

      • Given these factors, the rating is a 3/5