Morningstar

Zions Earnings: Previously Disclosed Fraud Issue Blemishes Otherwise-Solid Quarter

Zions’ management was confident that the fraud issue was an isolated incident.

In this Photo illustration a Zions Bancorporation logo is seen on a smartphone and a pc screen.
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Securities in This Article
Zions Bancorp NA
(ZION)

Key Morningstar Metrics for Zions Bancorporation

What We Thought of Zions Bancorporation’s Earnings

Zions Bancorporation ZION had good underlying third-quarter results, with earnings up 8% year over year. Net charge-offs of $56 million were high from fraud at two loans tied to non-depositary financial institutions. Excluding this, net charge-offs were only $6 million, which annualized is just 0.04% of loans.

Why it matters: With fraud-related disclosures also made by peers such as Fifth Third and Western Alliance, investors are understandably focused on whether the issue was a one-off or a harbinger of future losses. We believe the evidence points to the former.

  • After a portfolio review, Zions’ management was confident that this fraud issue was an isolated incident. As outsiders looking in, this can be difficult to assess, but the bank’s healthy credit metrics and conservative underwriting following the global financial crisis makes management’s assertion compelling.
  • Zions also provided more color in its NDFI loans, which sit at $2 billion across business credit, mortgage credit, consumer credit, private equity, and other loans. At 3% of its loans, Zions’ exposure is less than peers such as Truist, PNC, and Regions, which all have exposures of more than 10%.

Bottom line: After digesting these results, we will maintain our fair value estimate of $58 on no-moat-rated Zions and see the stock as roughly fairly valued.

  • Net interest income was up 8% from last year, driven by both a higher yield on its assets and a lower cost of deposits. As the benefit from fixed-rate asset repricing subsides, we expect net interest income growth to average 3% during our 10-year forecast period.

Between the lines: In light of recent bank merger news, management was guarded when asked about doing deals. This was not surprising, since First Horizon’s recent stock dip was attributable to signaling an openness to doing deals.

  • Zions stated it will look at opportunities but doesn’t have a strong urge to do a deal. It would most likely consider smaller deals that would increase its footprint in its existing markets.

Correction: A previous version of this story implied Western Alliance faced losses related to potentially fraudulent loans, but those losses have not been realized, and management believes at this time its existing collateral is enough to cover obligations. We do not cover Western Alliance.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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