The recently completed acquisition of Westchester Bank and the upcoming acquisition of Bank Leumi USA will likely be the chief drivers of Valley National Bancorp’s (NASDAQ: NASDAQ:VLY) balance sheet growth next year. These acquisitions will lift the average loan portfolio size, which will boost earnings. Margin expansion in a rising interest rate environment will likely further improve the bottom line. Overall, I'm expecting Valley National to report earnings of $1.19 per share in 2022, up from the estimated earnings of $1.13 per share in 2021. The December 2022 target price suggests a high upside from the current market price. Hence, I'm adopting a bullish rating on Valley National Bancorp.
Valley National's loan portfolio grew by 1.2% in the first nine months of 2021. The portfolio will jump up in the fourth quarter of 2021 and the first quarter of 2022 because of the acquisitions of Westchester Bank and Bank Leumi USA. As mentioned in a press release, Valley has completed the acquisition of Westchester Bank Holding on Dec. 1, 2021. Through the acquisition, Valley's loan portfolio would have increased by around $906 million, or 2.8%.
The upcoming acquisition of Bank Leumi USA will likely have a bigger impact on Valley’s balance sheet. The target had loans totaling $5.4 billion at the end of June 2021, as mentioned in a press release. As a result, the acquisition will likely boost Valley's loan portfolio by more than 16%.
On the other hand, the upcoming forgiveness of Paycheck Protection Program (“PPP”) loans will likely constrain loan growth. The PPP portfolio has already considerably declined to $874 million at the end of September 2021 from $2.2 billion at the end of December 2020, as mentioned in the 10-Q filing. As the PPP loans outstanding made up around 2.7% of total loans at the end of September 2021, the impending forgiveness will likely have a small but material impact on the total loan portfolio size.
Considering the factors mentioned above, I'm expecting the loan portfolio to increase by 3.8% in the fourth quarter of 2021 and 19.5% in 2022. The deposit growth will likely slightly exceed loan growth. The following table shows my balance sheet estimates.
The anticipated interest rate hike in 2022 will likely boost Valley National’s net interest margin. The Federal Reserve projects a 75-basis point hike in the federal funds rate next year. According to the management’s interest-rate sensitivity analysis, a 100-basis points increase in the interest rate can boost net interest income by around 4.45% in the first year of the rate change. The following table from the 10-Q filing shows the results of the management’s interest-rate sensitivity analysis.
Further, the acquisition of Bank Leumi USA will likely reduce the average deposit cost of the combined company. As mentioned in the merger and acquisition presentation, Bank Leumi USA had a total deposit cost of only 0.10%. In comparison, Valley's total deposit cost was higher at 0.18% in the third quarter of 2021, as mentioned in the earnings presentation.
Considering these factors, I'm expecting the margin to increase by five basis points in 2022.
Valley National’s non-interest expense has surged in recent quarters partly because of wage pressures. The management mentioned in the conference call that they just hired a new national deposit group, which has pushed up the total salary expense. Further, the company is continuing to add talent to its digital products area. Moreover, consulting costs increased in the third quarter of 2021 due to process improvement initiatives.
Going forward, wage pressures will likely continue to keep the non-interest expense elevated. Further, Valley National will experience one-time merger-related expenses as it integrates the branch network and systems of Westchester Bank and Bank Leumi USA.
Overall, I'm expecting the efficiency ratio to surge to more than 51% in the first half of 2022, before declining to 47% in the fourth quarter of 2022. In comparison, the efficiency ratio was 49.6% in 2020.
Loan growth and margin expansion will most probably lift earnings next year. On the other hand, the non-interest expense will likely drag the bottom line. Meanwhile, the provision expense will likely return to a normal level next year on the back of organic loan growth. The existing allowance level appears comfortable relative to the portfolio's credit risk. Allowances made up 1.09% of total loans, while non-accrual loans made up just 0.77% of total loans at the end of September 2021, as mentioned in the earnings presentation. Further, the net charge-offs were at a negligible level in the third quarter of 2021.
Overall, I'm expecting Valley National to report earnings of $1.19 per share in 2022. For the last quarter of 2021, I'm expecting the company to report earnings of $0.27 per share, taking full-year earnings to $1.13 per share. The following table shows my income statement estimates.
I have not changed my earnings estimates much from the previous estimates given in my last report on Valley National.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic, especially the Omicron Variant.
Valley National is offering a dividend yield of 3.2% at the current quarterly dividend rate of $0.11 per share. The company does not often change its dividend level; therefore, I’m not expecting an increase in the dividend next year.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-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.
Multiplying the average P/TB multiple with the forecast tangible book value per share of $9.46 gives a target price of $15.2 for the end of 2022. This price target implies a 12.2% upside from the Dec. 23 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
The stock has traded at an average P/E ratio of around 14.5x in the past, as shown below.
Multiplying the average P/E multiple with the forecast earnings per share of $1.19 gives a target price of $17.3 for the end of 2022. This price target implies a 27.8% upside from the Dec. 23 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
Equally weighting the target prices from the two valuation methods gives a combined target price of $16.3, which implies a 20.0% upside from the current market price. Adding the forward dividend yield gives a total expected return of 23.2%. Hence, I’m adopting a bullish rating on Valley National Bancorp.
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