Valley National: Risk keeps me away from Blue Chip High Yield Stocks (VLYPO)
Valley National Bancorp (VLY) is a regional bank that has seen its share of struggles with high interest rates and issues within the banking sector. The bank’s shares have been selling off recently and are near a 52-week low. in addition to, The bank has two preferred stock offerings (Nasdaq: Flippo) (Nasdaq: VLYPP) That each pays high-yielding dividends. VLYPO is currently yielding 9.55% at a floating rate while VLYPP is paying 6.9% and is scheduled to float next June at a rate of more than 10% if interest rates remain at current levels. last year, I analyzed why I was avoiding the bank. Based on recent financial statements, I continue to elect not to participate in any stock offerings.
Valley National Bancorp’s financial performance
Like many regional banks, Valley National was dealing with the effects Interest rates rise for longer than expected. Asset yields and borrowing costs rose rapidly in late 2022 and into 2023, as the Federal Reserve increased interest rates to fight inflation. The change in interest rates causes an increase in interest income and interest expenses for the bank. Unfortunately, the bank’s net interest income (interest income minus interest expense) has been declining continuously since late 2022.
On the balance sheet side, Valley National Bancorp has dealt with two straight quarters of declining deposits. This makes the bank more dependent on debt financing, which carries a higher interest rate and negatively affects profits. In the first quarter, Valley National’s loans rose, but there was a big change in the bank’s shift from short-term to long-term borrowing. Depending on the terms of the loans, Valley National may deal with higher interest expenses long after the current rate regime expires.
Risks on VLY
The primary risk to Valley National Bancorp’s viability remains its exposure to commercial real estate (CRE), specifically non-owner-occupied CRE. These loans represent approximately 30% of the bank’s total loan portfolio. In fact, Wedbush lists Valley among its banks with the most exposure to CRE. An additional concern here is that the bank’s allowance for credit losses is less than 1.0%, which is lower than the industry average of 1.6%. Even if the bank can survive the changes in the CRE market, I think its profits will decline due to the need to raise the allowance for credit losses.
Another concern is the bank’s level of uninsured deposits. At the end of the first quarter, nearly a quarter of the bank’s deposits were estimated to be uninsured. While Valley National has the liquidity to cover these deposits, investors should again be mindful of the cost of such transactions, which may involve higher interest expenses and lower earnings.
In addition, the bank’s high loan-to-deposit ratio is a problem. Although it declined during the coronavirus crisis, it has since risen to more than 100%. This high ratio combined with the low interest margin (nearly 1.5%) made me worry about how much the bank would be able to lend if it lost deposits. The bank’s loan portfolio does not appear to be generating enough of the profits needed to support these levels, and this may become more problematic as deposits flee.
Conclusion
Although I don’t rate Valley National Bancorp as a threat of imminent bankruptcy, I see risks that could see the bank go through the same rollercoaster ride that New York Community Bancorp went through earlier this year. This volatility would certainly lead to selling of the preferred stock and likely impair the value of the common stock for the foreseeable future, so I am excluding the bank’s common and preferred stock in favor of better opportunities in the industry.