Zions Bancorporation (NASDAQ:ZION), a prominent regional bank operating in the Western United States with a market capitalization of $8.2 billion, finds itself at a crossroads as it navigates a complex financial landscape. Recent analyst reports and financial results paint a picture of a bank facing both significant challenges and potential opportunities. According to InvestingPro analysis, the stock appears undervalued against its Fair Value estimate, while demonstrating impressive momentum with a 31.6% price return over the past six months. This comprehensive analysis delves into Zions' current position, future prospects, and the factors that could shape its performance in the coming years.
Recent Performance and Financial Overview
Zions Bancorporation has recently attracted attention from analysts, with Goldman Sachs upgrading the stock to a "Buy" rating in early 2025. This upgrade was primarily based on expectations of continued net interest margin (NIM) expansion, driven by fixed rate asset repricing, higher deposit betas, and funding base optimization. However, this optimistic outlook is tempered by concerns raised in earlier reports from other analysts.
The bank's third-quarter 2024 financials revealed some worrying trends in its loan portfolio. Criticized loans increased by 11%, with commercial & industrial loans up 15% and commercial real estate loans rising 24%. More concerning was the 66% jump in classified loans, primarily due to issues with multifamily properties. This deterioration in credit quality has raised red flags among some analysts and investors.
Despite these challenges, Zions has demonstrated confidence in its financial stability by increasing its dividend by 5% in the fourth quarter of 2024. This continues the bank's impressive track record of maintaining dividend payments for 54 consecutive years and raising them for 12 straight years, as reported by InvestingPro. The current dividend yield stands at 3.1%, reflecting management's commitment to shareholder returns even in the face of potential headwinds.
Net Interest Income and Margin
Net interest income (NII) has been a focal point for Zions, with recent reports indicating both challenges and potential upsides. In late 2024, the bank experienced a 2.7% decline in NII, following a 2.5% decrease in the previous quarter. This downward trend was attributed to a 100 basis point decrease in interest rates.
Looking ahead, analysts project a more positive outlook for NII. Zions has revised its 12-month forecast from "stable to slightly increasing" to "slightly to moderately increasing." This optimism is based on expectations of continued NIM expansion due to fixed rate asset repricing and funding base optimization.
Loan Portfolio and Credit Quality
Zions' loan portfolio, particularly its commercial real estate exposure, has come under scrutiny. The bank's office loan portfolio stands at $1.9 billion, representing 3.2% of total loans. With 39% of these loans maturing within the next year and an allowance for credit losses (ACL) of 3.9%, this segment requires careful monitoring.
While net charge-offs (NCOs) have remained relatively low at 0.10%, the significant increase in criticized and classified loans suggests potential future risks. Analysts anticipate that NCOs may trend higher in the coming quarters, which could necessitate increased provisions for credit losses.
Deposit Base and Funding
Zions' deposit base has shown some volatility, with average deposits falling by 1% year-over-year to $73.8 billion in mid-2024. However, more recent reports indicate a slight increase in deposits, albeit with lower non-interest bearing deposits (NIBD). The bank's deposit costs have risen significantly, reflecting the competitive environment for funding among regional banks.
In a strategic move to bolster its deposit base, Zions purchased four California branches in late 2024. This acquisition is expected to add $700 million in deposits and $400 million in loans, potentially strengthening the bank's market position in California.
Strategic Initiatives and Outlook
Zions is currently undertaking a significant upgrade of its core loan and deposit systems. This modernization effort aims to improve operational efficiency and enhance customer experience. While the upgrade process may involve short-term costs and implementation risks, it has the potential to deliver long-term benefits in terms of reduced regulatory costs and improved competitiveness.
The bank's slightly asset-sensitive position is expected to benefit from a slower path of Federal Reserve rate cuts and a steeper yield curve. Analysts anticipate that these factors, combined with top-line improvements and disciplined expense growth, could enable Zions to achieve positive operating leverage in 2025.
Industry Trends and Competitive Landscape
The regional banking sector is facing a period of transformation, with potential new regulations on the horizon. Moody's (NYSE:MCO) recent upgrade of the U.S. bank outlook to stable from negative suggests improving conditions for the industry as a whole. Lower interest rates could benefit asset quality and profitability across the sector. Zions maintains a relatively strong financial position with an InvestingPro Financial Health Score of "FAIR" and a P/E ratio of 12.5x, suggesting reasonable valuation metrics compared to peers.
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Zions' focus on small and medium-sized enterprises (SMEs) positions it to potentially benefit from increased commercial activity. Analysts anticipate that this focus could drive a return to mid-single digit growth levels in the bank's commercial portfolio.
Bear Case
How might increasing criticized and classified loans impact Zions' financial stability?
The significant increase in criticized and classified loans, particularly in the commercial real estate sector, poses a substantial risk to Zions' financial stability. If economic conditions deteriorate or the real estate market faces further challenges, these loans could transition into non-performing status, necessitating higher loan loss provisions and potentially eroding the bank's capital base. The 66% jump in classified loans is particularly concerning, as it may indicate deeper underlying issues in the loan portfolio that could take several quarters to fully materialize and resolve.
What risks does Zions face if economic conditions deteriorate?
In the event of an economic downturn, Zions could face multiple challenges. Its concentration in commercial and industrial loans, as well as its exposure to the office real estate market, could lead to increased defaults and loan losses. Additionally, the bank's vulnerability to deposit flight, due to its high percentage of held-to-maturity securities, could create liquidity pressures in a stressed economic environment. These factors, combined with potential regulatory changes for regional banks, could significantly impact Zions' profitability and growth prospects in a weakened economy.
Bull Case
How could Zions benefit from rising interest rates and NIM expansion?
Zions is well-positioned to capitalize on a rising interest rate environment and NIM expansion. As a slightly asset-sensitive bank, higher rates could lead to increased yields on its loan portfolio, particularly as fixed-rate assets reprice. The bank's efforts to optimize its funding base and manage deposit betas effectively could further enhance NIM expansion. Analysts project that these factors could drive Zions' return on tangible common equity (ROTCE) to 13-14% over time, significantly improving its profitability metrics and potentially leading to a higher valuation multiple.
What potential growth opportunities arise from Zions' recent branch acquisition and SME focus?
The recent acquisition of four California branches presents Zions with an opportunity to expand its market share and diversify its deposit base. This strategic move could provide a platform for organic growth in a key market, potentially leading to increased loan originations and fee income. Furthermore, Zions' focus on SMEs aligns well with expectations of increased commercial activity as economic certainty improves. This positioning could enable the bank to capture a larger share of the SME lending market, driving loan growth and potentially improving its competitive standing among regional banks.
SWOT Analysis
Strengths:
- Strong capital levels
- High loan-to-deposit ratio
- Streamlined corporate structure
- Asset-sensitive balance sheet positioned for rising rates
Weaknesses:
- Increase in criticized and classified loans
- Vulnerability to deposit flight
- Exposure to commercial real estate, particularly office loans
Opportunities:
- Potential for NIM expansion in a rising rate environment
- Growth in SME lending as economic conditions improve
- Efficiency gains from core system upgrades
- Market share expansion through strategic acquisitions
Threats:
- Potential new regulations for regional banks
- Economic uncertainty and its impact on credit quality
- Intense competition for deposits leading to higher funding costs
- Risks associated with implementation of new core systems
Analysts Targets
1. Goldman Sachs (January 7, 2025): Buy, price target not provided
2. Barclays (LON:BARC) (November 11, 2024): Underweight, $52.00
3. Truist Securities (October 23, 2024): Hold, $57.00
4. Barclays (October 23, 2024): Underweight, $52.00
5. Barclays (October 17, 2024): Equal Weight, $47.00
6. Barclays (October 9, 2024): Underweight, $47.00
7. Barclays (September 11, 2024): Underweight, $47.00
8. Argus (July 25, 2024): Hold, previous target $48.00 (new target not provided)
9. Barclays (July 24, 2024): Underweight, $47.00
10. RBC Capital Markets (July 23, 2024): Sector Perform, $54.00
This analysis is based on information available up to January 7, 2025, and reflects the complex landscape Zions Bancorporation navigates as it seeks to balance growth opportunities with potential risks in an evolving financial sector.
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