New York-based Valley National Bancorp is through with its Rodney Dangerfield imitation.
After months of receiving no respect from investors — shares are down 28% this year — CEO Ira Robbins on Thursday signaled a major strategic shift for his $61 billion-asset company, toward commercial-and-industrial lending and away from Valley's traditional focus on commercial real estate.
Speaking on a conference call with analysts, Robbins described CRE as a "wonderful asset class" that "continues to create incredible value," but he declared the stock volatility that's accompanied it the past few months is "unsustainable" and that the time to pivot has come.
"We will continue to remain active in the space but will manage our concentration more efficiently going forward," Robbins said. "These efforts are consistent with our strategic plan. I believe accelerating them will help to reduce the volatility in our valuation."
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"Not all CRE portfolios are created equally," Travis Lan, Valley's deputy chief financial officer, said in a February interview with American Banker.
There's more than a little truth to the claim. Commercial real estate assets helped propel Valley's ascent from a Northern New Jersey community bank to a superregional player with branches and commercial banking offices in six states. Indeed, since the start of 2021, they've driven strong returns, a steadily growing tangible book value per share and more than $1.6 billion in net income.
Valley on Thursday reported first-quarter net income of $96.1 million, down 34% year-over-year. Asset quality remained solid with net charge-offs at 0.19% of average loans, down slightly from 0.25% at March 31, 2023. CRE loans totaled $28.1 billion, down slightly from year-end 2023 and equal to 56% of total loans.
"Our focus on and expertise in commercial real estate lending has generated strong and stable risk-adjusted returns throughout our history," Robbins said.
Given current conditions, however, most investors have little-to-no appetite for the sector, which presents a problem for Valley National, whose portfolio amounts to 464% of risk-based capital — well above the 300% threshold that triggers additional regulatory scrutiny.
"We exist to serve our key stakeholders, and while I'm proud of our ability to exceed the expectations of our clients, communities and employees, I acknowledge the [stock price] volatility experienced by our shareholders is not sustainable," Robbins said.
In an investor presentation released along with first-quarter results, Valley set a goal of reducing its CRE concentration to 440% of risked-based capital by the end of 2024 and below 400% over the next two years. Similar guidance was not included in Valley's previous investor deck, published in January.
Robbins did not provide a detailed road map indicating how Valley intends to meet its new CRE targets, beyond noting the successful sale of more than $190 million in CRE, multifamily and construction loans in March. Valley will consider additional sales, but they would have to be at par, like the March transaction, Tom Iadanza, president of Valley's bank subsidiary, Valley Bank, added on the conference call.
Investor response to Robbins comments was muted, with Valley shares falling less than 1% to $7.77 on Thursday. Analyst Jake Civiello, who covers the company for Janney Montgomery Scott, wrote in a research note that its new course was designed to "give investors a glide path to better align with peers." At the same time, the shift away from CRE would likely constrain near-term loan growth and profitability, Civiello wrote. And there's no guarantee Valley hits the target.
It will be "challenging to achieve absent further proactive balance sheet measures to include portfolio sales or acquisitions that diversify loan exposure," Civiello wrote.
Though he reiterated his "buy" rating on the stock, Civiello trimmed earnings-per-share estimates for both 2024 and 2025.
