Few banks are as concentrated in commercial real estate as New Jersey-based Valley National Bancorp, whose stock has once again hit trouble as investors fret about real estate loans.
The bank's stock price, which fell sharply during last year's banking crisis, has tumbled 17% since turmoil hit the neighboring regional lender New York Community Bancorp. But executives at Valley, along with analysts who follow the bank, note that its loans are more diversified than New York Community's apartment-heavy portfolio and that it has a solid track record at keeping losses contained.
"Not all CRE portfolios are created equally," Travis Lan, Valley's deputy chief financial officer, said in an interview.
The bank acknowledges its high concentration in commercial real estate, a constant source of investor angst as some offices sit empty and other types of buildings struggle with rising interest rates and costs. Valley is among the few regional banks — New York Community is another — where commercial real estate loans make up more than 300% of total capital, a threshold that triggers additional regulatory scrutiny.
One problem at New York Community is that its real estate portfolio is largely made up of rent-regulated multifamily buildings, a sector that's struggling as high interest rates intersect with New York state's stricter rent increase rules. The Long Island bank, reportedly facing pressure from regulators, recently took steps to bolster its position and has
Valley's rent-regulated portfolio is just $420 million, or less than 1% of its total loans. CRE-related loans make up around half of Valley's portfolio, which consists of a mix of apartments, retail buildings, offices, industrial buildings and health care facilities. Its portfolio is largely in New Jersey, New York City, elsewhere in New York state and in Florida, where Valley
No segment of CRE has struggled more than the office sector, which has been hit particularly hard by remote work, as floors of office buildings sit empty. And few cities are seeing that issue play out more acutely than New York City.
But Valley has largely stayed away from the big office towers in Manhattan that are facing steep declines in their value. Its office portfolio is instead largely made up of smaller buildings in suburban areas, and the bank's executives say the owners of those buildings remain in good shape.
Even if those property owners do hit trouble, Valley's small-building focus makes it easier to turn a troubled office property into apartments or industrial centers, said Valley President Tom Iadanza. Government officials across the country have explored turning stressed office buildings into new housing, but they're finding that it's
"You can't take a Midtown high-rise and convert it to anything else today. Financially, it just doesn't work," Iadanza said, contrasting that with Valley's office loans where "you can do a lot more because it's not as big a space."
Some investors, sensing universal pain in commercial real estate, remain unconvinced. The ratings agency S&P Global also downgraded its rating on Valley last year by one notch, saying that a sustained period of high interest rates poses risks to its CRE-heavy portfolio.
Steven Alexopoulos, an analyst at JPMorgan, has a neutral rating on Valley even as its shares hover around multiyear lows. Last year was "challenging" for Valley, which started 2023 thinking its net interest income would soar by 16% to 18% but ended up seeing basically no change, he wrote in a note to clients last month.
Alexopoulos wrote that he's become "more comfortable" with the risks surrounding Valley's large commercial real estate portfolio and pointed to the company's track record in past cycles. After the 2008 crisis, Valley's strong underwriting helped keep its loan losses contained, while some competitors struggled.
But investors need more proof that that track record is "still intact," Alexopoulos wrote, noting the company's strong growth in recent years and its expansion into new markets such as Florida and Alabama.
"Once a fresh credit report card is in hand, this will answer the question as to whether the company has been able to thread the needle and maintain its historically better than peer credit risk profile while simultaneously delivering above peer growth," Alexopoulos wrote in a note to clients.
Other analysts are more optimistic and recommend that investors buy Valley's stock. High expenses and weaker income trends at Valley last quarter led to a disappointing earnings report, Stephens analyst Matt Breese wrote in a note to clients. But the "turning point is coming later this year" in the likely case that the Federal Reserve pivots to cutting interest rates, he predicted.
Valley "continues to check off a few key boxes," including a balance sheet that's well positioned for lower rates, low exposure to New York City office buildings and rent-regulated apartments and a history of strong credit quality, Breese wrote.
"While we were disappointed with 4Q23 earnings, we think it's too soon to cut bait on what we think could be a strong turnaround story in 2024," he wrote.
Higher interest rates are certainly putting some pressure on Valley borrowers, who are simultaneously dealing with higher
The bank has repriced a good chunk of its loan book to reflect today's higher interest rates without having to modify a single loan to make it easier for a struggling borrower to stay on track, according to company executives. Other borrowers who are facing loan repricings in the next year should also be well positioned to avoid modifications, Iadanza said.
He chalks that up to Valley's conservative underwriting, including a policy to avoid loan amounts that surpass more than 60% of buildings' values on average.
"We don't deviate. We don't push the envelope on that portfolio," Iadanza said.
As Valley's stock comes under pressure again, Iadanza said he and other executives have gotten a "handful of calls" from inquiring customers, and that any worries are quickly mollified.
Those calls are far less frequent than they were last March and April, when the
But Lan, Valley's deputy CFO, acknowledged the recent stock drops aren't easy to stomach.
"It's not fun looking at the screen, and it's tough internally, right, to deal with days where your stock's down 8% or 10%," he said.
As some investors bet against Valley, the bank is having more conversations with "high-quality, long-only buyers" who see value in buying shares of Valley and other regional banks, Lan said.
The KRE index, an exchange traded fund that tracks regional banks, jumped 3.19% on Thursday as investor worries over the sector eased. Valley's shares rose 3.47%, while New York Community's stock price increased 6.25%.
On research platforms, the two banks do have similarities beyond just their proximity, Lan said. Like New York Community, Valley has lower capital levels than larger banks and a high concentration in CRE.
But the "people that know us … acknowledge the differences" between Valley's portfolio and New York Community's, Lan said.
Observers may also be cognizant that, unlike New York Community, Valley is unlikely to face a sudden surprise from regulators.
Last year, New York Community
The OCC reportedly pressured New York Community to build more capital and announce the actions that ultimately triggered its recent stock volatility.
Valley is different in two ways. It has some $61 billion of assets, putting the $100 billion mark much further away unless it undertakes a major merger. And if it were to cross that barrier, its lengthy history of being regulated by the OCC could help prevent sudden surprises.
"The OCC has been our regulator for, I think, as long as anyone here can remember," Lan said. "There is a different level of scrutiny that comes with that."
