Zions Bancorp Earnings: Deposit Costs Soar, but We Still Think Market Prices Are Far Too Harsh

No-moat-rated Zions Bancorp ZION reported mixed second-quarter results as deposit costs soared during the quarter. Earnings per share of $1.11 were in line with FactSet consensus of $1.08 but missed our expectations of $1.26. The miss was largely driven by weaker net interest income, or NII, of $591 million versus our estimate of $626 million, and higher noninterest expenses. Higher funding costs have been a common pattern among the banks this quarter, but Zions stood out in this regard, with the highest deposit beta and the largest increase in interest-bearing deposit costs so far. Management reduced its NII expectations, indicating flat to slightly decreasing levels from the current quarterly run rate, which implies to us that the bank will see a decline in annual NII in 2023. This is the first bank in our coverage where we’ve seen this amount of pressure on NII. Even so, the bank is still set to earn decent adjusted returns on tangible equity (likely somewhere in a 9%-11% range) and is still building capital.

While we view these as more difficult results for Zions on a fundamental basis (driven primarily by the deposit repricing), as we’ve emphasized in the past the stock price has been implying something much more severe. In our view, these results are much better than what is being implied by the current market value. We expect to lower our NII outlook and raise our fee outlook for Zions while increasing our expense outlook slightly. We also plan to re-evaluate our longer-term deposit cost assumptions for the bank, as they may be structurally a bit higher than we were anticipating—although we acknowledge there is still a degree of uncertainty about how much costs could fall if/when base rates come back down again. As such, we anticipate our current fair value estimate of $58 per share will likely fall by a mid-single-digit percentage, but given the large discount relative to the stock price, we still expect the shares to be materially undervalued after our updates.