Valley National Bancorp (VLY), a prominent player in the financial landscape, has seen a surge in revenues, propelled by heightened loan demands, elevated interest rates, and shrewd acquisitions. Despite this commendable growth trajectory, a significant strain on the Net Interest Margin (NIM) is looming, primarily due to the persistently high rates and an upswing in non-interest expenses. Let’s take a closer look at the factors influencing the bank’s performance.
Robust Revenue Growth Amid Headwinds
Valley National’s net revenues have witnessed an impressive Compound Annual Growth Rate (CAGR) of 16.1% over the last six years (2017-2023), buoyed by a sustained upsurge in loan balances. This period saw net loans record a CAGR of 18.2%. The company’s strategic acquisitions, in conjunction with the impact of high interest rates and a proactive approach to augment fee income, are expected to sustain revenue growth in the foreseeable future. Management projects mid-single-digit loan growth in 2024, with a primary focus on expanding commercial and industrial as well as non-investor commercial real estate loans.
However, it’s not all smooth sailing for Valley National. The bank has faced a continuous uptick in non-interest expenses over the past six years, with expenses on the rise at a CAGR of 14.8%, attributed to the escalation in salary and employee benefits and occupancy expenses. As the company continues to grow through acquisitions and invests in revenue-generating areas, it is anticipated that overall costs will remain elevated in the near term.
Strain on Net Interest Margin (NIM)
Elevated funding costs arising from the prevailing high interest rates are expected to continue exerting pressure on Valley National’s net interest margin in the next couple of quarters. Although NIM, on a tax-equivalent basis, rose in 2020, 2021, and 2022, a decline was recorded in 2023. With the Federal Reserve poised to maintain high rates, the probability of witnessing a robust NIM expansion in the near term appears bleak.
Analysts’ sentiment also reflects this challenging scenario, with the Zacks Consensus Estimate for VLY’s 2024 and 2025 earnings being revised downward by 5.7% and 1.7%, respectively, over the past 30 days, signaling a cautious outlook for the bank’s earnings growth potential. This has led to the current Zacks Rank #3 (Hold) for VLY, with its shares showing a decline of 29.6% over the past 12 months compared to the industry’s fall of 17.7%.
Stocks to Consider
A couple of finance stocks that have shown promise are Bridgewater Bancshares (BWB) and CrossFirst Bankshares (CFB). Bridgewater Bancshares’ 2024 earnings estimates have risen by 7.6% over the past 30 days, with the company’s shares gaining 15% in the past three months. At present, BWB holds a Zacks Rank of 1 (Strong Buy). In a similar vein, CrossFirst Bankshares’ 2024 earnings estimates have been adjusted 1.4% upward in the past 30 days, while the stock has seen a 17.6% surge in the past three months, also flaunting a Zacks Rank #1.
The road ahead for Valley National Bancorp may indeed be rocky, but the company’s growth and resilience are emblematic of its robust foundation and strategic vision. While challenges persist, investors can take solace in the bank’s history of navigating through stormy weather and emerging stronger on the other side.
