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

Zions Bancorp Stock at a Glance

• Fair Value Estimate: $58.00
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Zions Bancorp Earnings Update

Zions Bancorp ZION reported mixed second-quarter results as deposit costs soared. Earnings per share of $1.11 were in line with the 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, as well as higher noninterest expenses.

Higher funding costs have been a common pattern for banks this quarter, but Zions stood out, reporting 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 we cover where we’ve seen this amount of pressure on NII. Even so, the bank is 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 results as more difficult for Zions on a fundamental basis (driven primarily by the deposit repricing), as we’ve emphasized in the past, its stock price has been suggesting something much more severe. In our view, these results are much better than what is implied by the stock’s 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 assumptions for the bank’s deposit costs, 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.

We anticipate our fair value estimate of $58 per share will 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.