Action Valley National Bancorp: Strong Card Revenue Growth (NASDAQ:VLY)

Benedek

Earnings of Valley National Bancorp (NASDAQ: VLY) will most likely increase this year thanks to growth in acquired and organic loans. Additionally, net interest margin expansion in a rising rate environment will boost earnings. Overall I expect Valley National to report earnings of $1.25 per share for 2022, up 11% year-over-year. Compared to my last company report, I only slightly increased my revenue estimate. For 2023, I expect earnings to grow 24% to $1.55 per share. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on Valley National Bancorp.

Organic loan growth will slow

Valley National Bancorp’s loan portfolio jumped 23% in the second quarter, or 93% annualized, in part due to the acquisition of Bank Leumi USA. Additionally, organic loan growth was exceptionally strong at around 26% annualized for the quarter, as reported in the earnings release. Organic growth will most likely decline sharply in the second half of the year as the second quarter level was unsustainable. It was high because borrowers tried to lock in rates before interest rates could rise further. This pre-weighted or pre-weighted borrowing sucked up demand for credit in the coming quarters. High borrowing costs will particularly hurt the residential mortgage segment, which accounts for about 12% of total lending.

On the other hand, commercial loan growth will likely be satisfactory, as management mentioned on the conference call that the commercial loan pipeline remains strong. In addition, strong labor markets bode well for loan growth. Valley National Bancorp’s operations are geographically well diversified. The company is present in New Jersey, New York, Florida and Alabama. Therefore, the national average is appropriate for assessing credit demand in Valley National markets. As shown below, the unemployment rate is currently near multi-decade lows.

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Data by Y-Charts

Management mentioned on the conference call that it expects annualized loan growth of 8% to 10% for the second half of 2022. Given the factors listed above, I expect the actual loan growth misses management’s target. I expect the loan portfolio to grow 1.5%, or 6% annualized, each quarter through the end of 2023. In my last Valley National report, I estimated growth in 21% full-year loans for 2022. I’m now expecting 31% loan growth for this year. I have not changed my loan growth estimate for the second half. However, my estimate for 2022 is now higher than before, as Valley National’s organic loan growth surprised me in the second quarter.

Meanwhile, I expect deposits to grow in line with loans. The following table shows my balance sheet estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial situation
Net loans 24,884 29,537 31,877 33,794 44,394 47 119
Net loan growth 36.6% 18.7% 7.9% 6.0% 31.4% 6.1%
Other productive assets 4,030 4,199 4,913 5,855 6,110 6,233
Deposits 24,453 29,186 31,936 35,632 45,207 47,981
Loans and sub-debts 3,773 3,271 3,500 2,136 3,043 3,105
Common Equity 3,141 4,174 4,382 4,874 6,275 6,817
Book value per share ($) 9.4 12.3 10.8 11.8 12.3 13.4
Tangible BVPS ($) 5.9 8.0 7.2 8.1 8.2 9.3

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Deposit fees have become stickier than before

Valley National Bancorp’s deposit cost is somewhat sticky due to the presence of non-interest bearing deposits, which make up 36.8% of total deposits. Although still not entirely enviable, the composition of deposits has improved considerably in the first half of this year. Non-interest bearing deposits increased to 36.8% at end-June 2022 from 32.8% at end-December 2021.

Partly due to low deposit beta, Valley National Bancorp’s margin is moderately rate sensitive. Based on the results of management’s interest rate sensitivity analysis presented in File 10-Q, a 200 basis point increase in interest rates could increase net interest income by 8.38% over twelve months.

Valley National Bancorp Interest Rate Sensitivity

Filing 2Q 2022 10-Q

As mentioned in the earnings presentation, Valley National originated new loans during the second quarter at a rate higher than the portfolio’s average rate. Therefore, loan additions in the rest of the year are very likely to increase the average return on earning assets and, therefore, the margin.

Given these factors, I expect the margin to increase by 40 basis points in the second half of 2022 and an additional 10 basis points in 2023. Compared to my last report on Valley National, I increased my margin estimate as the rate hike cycle is more extreme than I previously expected.

Provisioning should remain above average

Valley National’s loan loss provisions jumped in the second quarter due to the acquisition of Bank Leumi USA. Following the acquisition, outstanding loans represented 0.72% of total loans while provisions represented 1.13% of total loans at the end of June 2022. As the economic outlook has deteriorated over the past three month, provisioning for expected loan losses will likely see an increase. In addition, loan additions will require provisioning for expected loan losses.

Overall, I expect net provision expense to be above average through the end of 2023. I expect net provision expense to be 0.11% of total loans quarterly on an annualized basis. By comparison, the net provision charge averaged 0.09% from 2017 to 2019. In my last Valley National report, I estimated a net provision charge of $36 million for 2022. I now have nearly doubled my estimate for the full year to $74 million. because the increase in acquisition-related provision charges in the second quarter was higher than expected.

Profits are expected to increase by 11%

Earnings will likely increase this year due to growth in acquired and organic loans. In addition, margin expansion will support net income. On the other hand, higher provisioning will limit earnings growth. Overall, I expect Valley National to report earnings of $1.25 per share for 2022, up 11% year-over-year. For 2023, I expect earnings to grow 24% to $1.55 per share. The following table shows my income statement estimates.

EX18 FY19 FY20 FY21 FY22E FY23E
Financial summary
Net interest income 857 898 1,119 1,210 1,776 2,069
Allowance for loan losses 33 24 126 33 74 52
Non-interest income 134 215 183 155 209 207
Non-interest charges 629 632 646 692 1,064 1,142
Net income – Common Sh. 249 297 378 461 614 788
BPA – Diluted ($) 0.75 0.87 0.93 1.12 1.25 1.55

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last report on Valley National, I estimated earnings of $1.21 per share for 2022. My updated earnings estimate is barely changed as upward revisions to loan growth and margin estimates negate the upward revisions to provision expenses and operating expenses.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

High Price Rise Warrants Buy Rating

Valley National offers a dividend yield of 4.0% at the current quarterly dividend rate of $0.11 per share. Earnings and dividend estimates suggest a payout ratio of 31% for 2022, well below the five-year average of 59%. However, I do not expect an increase in the dividend level as Valley National does not change its dividend level frequently. The company has maintained its quarterly dividend at $0.11 per share since the last quarter of 2013.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Valley National Bancorp. The stock has traded at an average P/TB ratio of 1.53 in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
T. Book value per share ($) 5.9 8.0 7.2 8.1
Average market price ($) 11.8 10.7 8.4 13.2
Historical P/TB 1.99x 1.34x 1.16x 1.64x 1.53x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $8.23 yields a target price of $12.6 for the end of 2022. This price target implies an upside of 13.2% compared to the closing price on September 28. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.33x 1.43x 1.53x 1.63x 1.73x
TBVPS – Dec 2022 ($) 8.23 8.23 8.23 8.23 8.23
Target price ($) 10.9 11.8 12.6 13.4 14.2
Market price ($) 11.1 11.1 11.1 11.1 11.1
Up/(down) (1.6)% 5.8% 13.2% 20.6% 28.0%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 11.9x in the past, as shown below.

EX18 FY19 FY20 FY21 Medium
Earnings per share ($) 0.75 0.87 0.93 1.25
Average market price ($) 11.8 10.7 8.4 13.2
Historical PER 15.8x 12.2x 9.0x 10.5x 11.9x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the expected earnings per share of $1.25 yields a price target of $14.9 for the end of 2022. This price target implies a 33.9% upside from at the closing price on September 28. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 9.9x 10.9x 11.9x 12.9x 13.9x
EPS 2022 ($) 1.25 1.25 1.25 1.25 1.25
Target price ($) 12.4 13.6 14.9 16.1 17.4
Market price ($) 11.1 11.1 11.1 11.1 11.1
Up/(down) 11.4% 22.6% 33.9% 45.2% 56.4%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $13.7, implying a 23.6% upside from the current market price. Adding the forward dividend yield gives an expected total return of 27.5%. Therefore, I maintain a buy rating on Valley National Bancorp.

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