Valley National Bancorp (NASDAQ:VLY) was little changed Monday after JPMorgan upgraded the stock to overweight from neutral. The Wall Street firm said the concern around Valley National’s commercial real estate appears “overblown” as Manhattan offices represents less than 1% of its loans.
Valley shares are trading below tangible book value and has an elevated implied cost of equity tied to concerns about its above peer commercial real estate exposure (35% of total assets vs. peers 19%), J.P. Morgan analyst Alex Lau wrote in a note to clients.
"Even though the industry is currently seeing stress in the CMBS loan market for office CRE, Valley's office loan exposure is different and granular with the average loans size of $2.2 Million (below peers at $3.1 Million and well below CMBS loans that were reported to have defaulted)," Lau said.
However, when looking at the area of CRE in the most stress in central business district office, the bank only has about ~$0.2B in Manhattan office CRE loans, or less than 1% of total loans, he said.
The bank's underwriting metrics for office loans are conservative with a weighted average loan-to-value of 54% vs. 56% for peers, and debt service coverage ratio of 1.90x vs. 1.69x for peers.
In addition, credit quality has been stable; out of $1.3 Billion in CRE loans that renewed in Q4 22 and Q1 2023, no office loans downgraded, Lau said.
VLY handed back one cent to $7.99.
