Morningstar | Maintaining Fair Value Estimate as Zions Bancorp Navigates a Slowing Interest Rate Cycle. See Updated Analyst Note from 23 Apr 2019
No-moat rated Zions Bancorp reported a reasonable first quarter that fit well within our thesis for the firm. Earnings per share declined slightly to $1.04 this quarter due to a few one-time gains in first-quarter 2018. After adjusting our model to reflect changing loan yields and credit costs, we will maintain our fair value estimate of $46 per share for the company.With regards to net interest income, we think that Zions is doing all right at managing the interest rate cycle. While deposit costs increased 12 basis points quarter over quarter, which a relatively high deposit beta, the bank was largely able to maintain its high proportion of noninterest-bearing deposits. The net result was 1 basis point of net interest margin expansion from last quarter and 6% of net interest income growth from the first quarter of 2018. We think deposit costs still have room to rise, which will slightly reduce the net interest margin over the course of 2019.
One of Zions' key weaknesses is a lack of fee income. This issue exposed itself this quarter as noninterest income shrank 4% from the linked quarter in 2018. This was largely due to higher earnings credit rates on commercial deposit balances. We would like to see Zions develop more sustainable sources of noninterest income, as we think that it would help the company retain more stability over the interest rate cycle. We were positive on Zions’ noninterest expense, which essentially increased with inflation.
Zions continues to show the benefits of investing in more disciplined credit underwriting. This quarter marks the fourth consecutive quarter in which Zions had zero or negative charge-offs, which we think is indicative of the substantial improvements Zions made controlling credit costs. Overall, we are positive on Zions’ material improvements in this regard.
Zions is a commercial bank. The company provides a range of banking and related services, primarily in Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming. The company provides community banking services through its main business lines of small and medium-sized business and corporate banking; commercial and residential development, construction and term lending; retail banking; treasury cash management and related products and services; residential mortgage servicing and lending; trust and wealth management; capital markets activities, including municipal finance advisory and underwriting; and investment activities.
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