Rate Hikes to Aid Valley National (VLY) Top Line Amid Cost Woes
Valley National Bancorp VLY is well-positioned to gain from rising interest rates and higher loan demand. Moreover, supported by a solid balance sheet and liquidity position, the company is expected to grow through opportunistic acquisitions, which will likely support its financials.
However, persistently rising expenses are expected to hurt the bottom line to some extent. Valley National’s high exposure to risky loan portfolios makes us apprehensive.
Analysts also do not seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for VLY’s current-year earnings has been revised 2.5% lower over the past 30 days. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of Valley National have lost 21.8% compared with the 6.5% decline recorded by the industry.
Image Source: Zacks Investment Research
Looking at fundamentals, Valley National’s revenues witnessed a compound annual growth rate (CAGR) of 11.3% over the last four years (2018-2021). Likewise, net loans saw a CAGR of 4.9% over the last three years (ended 2021). Both revenues and net loans improved in the first quarter of 2022. Driven by strategic buyouts and higher loan demand on the back of an improving economy, revenue growth is expected to continue.
Moreover, VLY’s net interest margin (NIM) has been witnessing an improving trend over the past couple of years. After recording a fall in 2019, NIM (on a tax-equivalent basis) increased in 2022, 2021 and the first quarter of 2022. With the Federal Reserve having already raised interest rates thrice so far this year, along with expectations of more hikes during 2022 to control inflation, the company’s NIM is expected to keep improving.
Given a solid balance sheet position, the company remains well-positioned to grow on the back of opportunistic buyouts. In April, Valley National completed the deal to acquire Bank Leumi Le-Israel B.M.’s U.S. banking arm. Last year, it closed the deal to acquire Westchester Bank and the Arizona-based advisory firm Dudley Ventures. These deals, along with several past acquisitions, are expected to be earnings accretive and help Valley National diversify revenues and footprint.
Further, the company remains focused on evaluating its branch network. It monitors the operating performance of each of its branches and implements tailored action plans to improve the profitability and deposit levels for the branches that underperform. VLY is targeting the consolidation of approximately 5% of its retail branches (or nearly 13 branches) by this year-end.
However, the company’s expenses witnessed a CAGR of 3.2% over the last four years (2018-2021), with the uptrend persisting in the first quarter of 2022. The rise has mainly resulted from an increase in net occupancy and equipment expenses. As the company continues to expand through acquisitions and invest in revenue growth areas, overall costs are anticipated to remain elevated in the near term.
Also, a major part of Valley National’s loan portfolio comprises commercial real estate and residential mortgage loans. As of Mar 31, 2022, the company’s loan exposure to these sectors was 75.3%. Though the housing and real estate sectors have been improving, any deterioration in real estate prices in the future will likely pose a threat to the company’s financials.
Stocks Worth Considering
A couple of better-ranked stocks from the finance space are S&T Bancorp, Inc. STBA and Credit Acceptance Corporation CACC. Currently, STBA sports a Zacks Rank #1 (Strong Buy), while CACC carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for S&T Bancorp’s current-year earnings has been revised 5.4% upward over the past 60 days. Over the past year, STBA’s share price has declined 11.1%.
Credit Acceptance’s current-year earnings estimates have been revised 11.8% upward over the past 60 days. CACC’s shares have gained 4.4% over the past year.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Credit Acceptance Corporation (CACC) : Free Stock Analysis Report
S&T Bancorp, Inc. (STBA) : Free Stock Analysis Report
Valley National Bancorp (VLY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
