Zions Earnings: Net Interest Income Is Stabilizing, Improving Profitability Visibility

Key Morningstar Metrics for Zions Bancorp

• Fair Value Estimate: $58.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Zions Bancorp’s Earnings

Zions Bancorp’s ZION third-quarter results were much more encouraging than last quarter’s. Much of the pressure the bank was facing seemed to be accelerating, but it now seems to be bottoming. Earnings per share of $1.13 were in line with FactSet consensus of $1.11 and ahead of our expectations of $1.01.

Deposit costs continued to soar in the quarter, but more importantly, the pressure on net interest income is starting to even out. NII was down quarter over quarter, but the decline of 1% this quarter was much better than the precipitous decline of 13% last quarter. Management now expects NII to be roughly stable one year from now, compared with the current quarter’s results. It appears Zions is at or near the bottom of NII in the current environment, which should chip away at some of the market’s uncertainty.

Our thesis all along was that Zions would face more pressure than its peers but be fine in the end, earning decent adjusted returns on tangible equity (we think somewhere in the 9%-11% range) and building capital. Current results support that thesis. Fees, expenses, and provisioning were essentially in line with our expectations. The outlook for fees did not change materially, while expenses are now expected to increase slightly in the future. In our view, the biggest piece was the stabilization in NII.

As we incorporate this quarter’s results, we do not expect a material change in our current $58 fair value estimate, and continue to view shares as undervalued. Zions is one of the banks facing more funding pressure than peers, and it therefore has a higher degree of uncertainty. However, we think the market is being too harsh with the current valuation.