Summary
- Valley National Bancorp is the rare regional bank which has posted extraordinarily robust results in Q3 2020, its highest ever quarterly earnings, amid COVID-19 and near-zero interest rates in the US.
- The bank has been ticking the right boxes for the last few years; its NII doubled from $541 million in FY15 to over $1100 million in FY20.
- 2020 has presented a good opportunity for buying regional bank stocks; Valley National is still cheap, and has solid fundamentals, which seem only partly built into its stock price.
Valley National Bancorp (VLY) is the rare regional bank which has posted extraordinarily robust results in Q3 2020, its highest-ever quarterly earnings, in the middle of a health pandemic and near-zero interest rates in the US. The NJ-based bank has demonstrated an ability to maintain earnings despite the challenging macroeconomic scenario; its Q3 FY20 net interest income (NYSEMKT:NII) increased ~27% YOY, which speaks for VLY’s quality of income and its management of funding costs. This ability to maintain financial strength through crises is reason enough to own the stock. And VLY’s still-attractive valuation, despite the upswing in the stock since the US election results, makes it a longer-term bet.
VLY has been ticking the right boxes for the last few years. Its NII doubled from $541 million in FY15 to over $1100 million in FY20 (annualized based on YTD performance). While the bank's NIM stayed healthy, its loan book increased from $16 billion to $32 billion in the period, non-accrual loans remained low percentage of its total loans (~0.6% in Q3 FY20), and its efficiency ratio improved from 79% in FY15 to 57% in FY19, and further to ~48% in Q3 FY20. The bank has expanded scale through strategic acquisitions, last done with Oritani Financial Corp. in 2019, deepening its hold in New Jersey, while maintaining locations in New York, Florida and Alabama. Given this expansion and growth, considered together with its healthy capital structure, the bank is well-positioned for sustained growth.
From an investor’s point of view, VLY has been a regular dividend payer, with its dividend payout around 50% in FY19. With earnings expected to improve, the consistent dividend is a neat little bow to tie up the gift hamper.
What makes VLY more attractive compared to some of the other regional banks is its focus on cost management - its NIM and efficiency are markedly better than those of its peers as of Q3 FY20. The bank has achieved NII and NIM growth in YTD FY20 by lowering the rate on its interest-bearing deposits, and expects there is still room for further reductions in FY21. Even allowing for the lowered rates on deposits in the quarter, which boosted VLY’s NIM, the bank’s operations seem significantly better than its closest peers.
| Peers include Community Bank System (CBU), Fulton Financial Corporation (FULT), NBT Bancorp (NBTB), New York Community Bancorp (NYCB), Provident Financial Services (PFS), Sterling Bancorp (STL) and Webster Financial Corporation (WBS) |
In the environment where NIMs are getting squeezed across the sector, VLY’s guidance of achieving $3-4 million cost saving in 2021, possibly through repricing its funds and improving control on expenses by closure of select branch locations, is expected to ensure that its NIM will remain healthier than most peers. Management’s guidance about maintaining operating leverage at the current levels, demonstrated in efficiency levels of about 50%, is heartening despite the continued exposure to macroeconomic uncertainties.
