Action Valley National Bancorp: Growth in organic and acquired loans to increase profits (VLY)

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Valley National Bancorp’s (NASDAQ:VLY) earnings will likely continue to rise this year thanks to acquisitions. The outlook for organic loan growth is also promising given the country’s strong economy. In addition, net interest income is moderately sensitive to changes in interest rates; therefore, revenues will benefit from a rising interest rate environment. Overall, I expect Valley National to report earnings of $1.21 per share in 2022, up 7.6% year-over-year. Compared to my last report on Valley National, I have revised my earnings estimate up slightly due to revisions to loan growth and spread expansion. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on Valley National Bancorp.

Growth outlook for acquired and organic loans remains positive

Valley National’s loan portfolio grew by a remarkable 4.7% in the fourth quarter of 2021 (19% annualized), driven in part by the acquisition of Westchester Bank. Further growth by acquisition is expected due to the upcoming acquisition of Bank Leumi, USA. The transaction is now expected to close on April 1, 2022, according to a recent press release. The acquisition will likely add approximately $5.4 billion in loans, increasing Valley National’s loan portfolio by approximately 15.8%.

The outlook for organic loan growth is also promising. The company achieved annualized organic growth in non-PPP (Paycheck Protection Program) loans of about 13% in the fourth quarter, as shown in the earnings presentation. This momentum should continue until 2022 due to the economic recovery. Valley National Bancorp operates in several states, namely New Jersey, New York, Florida, and Alabama. Because of this geographic diversity, national-scale economic measures are appropriate for assessing future credit demand. Both the unemployment rate and the GDP growth rate show that economic activity is robust.

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Data by YCharts

Management mentioned in the presentation that they are targeting organic loan growth of 7% to 9% in 2022. In my previous report on Valley National, I expected organic loan growth in the mid-single digits. Given last quarter’s strong performance and the economic recovery, I now believe that organic loan growth this year could be closer to the mid-single digit range. Combining the anticipated organic and acquired loan growth, I expect the loan book to grow 21% by end-December 2022 compared to end-2021. Other balance sheet items will likely grow in line with loans. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 18,211 24,884 29,537 31,877 33,794 40,992
Net loan growth 6.4% 36.6% 18.7% 7.9% 6.0% 21.3%
Securities 3,525 4,030 4,199 4,913 5,855 6,894
Total assets 24,002 31,863 37,436 40,686 43,446 54,679
Deposits 18,153 24,453 29,186 31,936 35,632 45,085
Loans and sub-debts 3,064 3,773 3,271 3,500 2,136 2,515
Common equity 2,323 3,141 4,174 4,382 4,874 6,276
Book value per share ($) 8.8 9.4 12.3 10.8 11.8 12.4
Tangible BVPS ($) 6.0 5.9 8.0 7.2 8.1 9.4

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Moderate sensitivity to interest rates to further increase turnover

Management’s interest rate sensitivity analysis presented in File 10-K shows that the current balance sheet is moderately sensitive to changes in interest rates. A 100 basis point increase in interest rates can increase net interest income by 5.13% year-over-year.

Valley National Interest Rate Sensitivity

Filing 10-K 2021

The above analysis is based on a static balance sheet. Valley National has the opportunity to further improve its balance sheet, which will contribute to margin expansion. Excess cash on Valley National’s books increased in 2021. Interest-bearing deposits with other banks, a cash component, increased to $1.8 billion at the end of December 2021 from $1.1 billion. dollars at the end of December 2020. Valley can quickly move excess cash into higher yielding securities after a rate hike.

Given these factors, I expect the margin to improve by seven basis points in 2022. In my last report on Valley National, I expected the margin to increase by five basis points this year. I have revised my margin estimate up somewhat due to economic data released since my last report on Valley National.

Expected earnings of $1.21 per share

Expected loan growth and expanding margins will likely drive earnings growth this year. On the other hand, the expense of provisions will probably increase this year, which will limit the growth of profits. Additions to the loan portfolio will likely result in required provisioning for expected loan losses. The existing provision level seems sufficient to cover the credit risk of the portfolio; therefore, I do not expect the existing portfolio to result in higher provisioning for this year. Provisions represented 1.1% of total loans while unrecognized loans represented 0.7% of total loans at the end of December 2021, as mentioned in the earnings release. Overall, I expect provision charges to remain at normal pre-pandemic levels this year. I expect provision charges to be around 0.09% of total loans in 2022, which is the same as the average ratio of provision charges to total loans for 2017 to 2019.

In addition, non-interest expenses will likely increase as revenue increases. However, the acquisition of Bank Leumi will likely result in cost savings. Management mentioned on the conference call that it expects to keep the efficiency ratio below 50% in 2022.

Given these factors, I expect Valley National to report earnings of $1.21 per share in 2022, up 7.6% year-over-year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial summary
Net interest income 660 857 898 1,119 1,210 1,484
Allowance for loan losses ten 33 24 126 33 36
Non-interest income 112 134 215 183 155 244
Non-interest charges 509 629 632 646 692 847
Net income – Common Sh. 152 249 297 378 461 613
BPA – Diluted ($) 0.58 0.75 0.87 0.93 1.12 1.21

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last report on Valley National, I expected the company to report earnings of $1.19 per share in 2022. I raised my earnings estimate slightly as I revised my earnings estimate upwards. loan growth and margin expansion. I also increased my estimate of operating expenses.

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic and the magnitude of interest rate increases.

Year-End Target Price Signals a Good Opportunity for Capital Appreciation

VLY offers a dividend yield of 3.2% at the current quarterly dividend rate of $0.11 per share. Earnings and dividend estimates suggest a payout ratio of 40% for 2022, which is below the five-year average of 59%. Despite the below-average payout ratio, I don’t expect a dividend increase, as 40% remains high. Additionally, Valley National has maintained its dividend at $0.11 per share since the last quarter of 2013. It seems unlikely that the company will break its tradition this year.

I use historical price/book tangible (“P/TB”) and price-earnings (“P/E”) multiples to value Valley National. The stock has traded at an average P/TB ratio of 1.61 in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
T. Book value per share ($) 6.0 5.9 8.0 7.2 8.1
Average market price ($) 11.7 11.8 10.7 8.4 13.2
Historical P/TB 1.95x 1.99x 1.34x 1.16x 1.64x 1.61x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $9.37 yields a target price of $15.1 for the end of 2022. This price target implies an upside of 9.0% compared to the closing price on March 16. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.41x 1.51x 1.61x 1.71x 1.81x
TBVPS – Dec 2022 ($) 9.37 9.37 9.37 9.37 9.37
Target price ($) 13.2 14.2 15.1 16.1 17.0
Market price ($) 13.9 13.9 13.9 13.9 13.9
Up/(down) (4.5)% 2.2% 9.0% 15.8% 22.5%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 13.7x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
Earnings per share ($) 0.58 0.75 0.87 0.93 1.21
Average market price ($) 11.7 11.8 10.7 8.4 13.2
Historical PER 20.3x 15.8x 12.2x 9.0x 10.9x 13.7x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.21 yields a price target of $16.5 for the end of 2022. This price target implies a 19.1% upside from at the closing price on March 16. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 11.7x 12.7x 13.7x 14.7x 15.7x
EPS 2022 ($) 1.21 1.21 1.21 1.21 1.21
Target price ($) 14.1 15.3 16.5 17.7 18.9
Market price ($) 13.9 13.9 13.9 13.9 13.9
Up/(down) 1.6% 10.4% 19.1% 27.8% 36.5%
Source: Author’s estimates

An equal weighting of the target prices from the two valuation methods gives a target price of $15.8, implying a 14.0% upside from the current market price. Adding the forward dividend yield gives an expected total return of 17.2%. Therefore, I maintain a buy rating on Valley National Bancorp.

About Harold Shirley

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