EUR 850.00 For Business Accounts Only

Morningstar | Rising Rates and Expense Savings Should Drive Results Forward for Zions

Zions Bancorporation is one of the smaller regional banks we cover, with less than $100 billion in assets. It is primarily a commercial bank focused on small to midsize businesses. Roughly three quarters of the bank's loan book is either commercial- or commercial real estate-focused, and almost one fifth of the commercial loan book is for commercial loans of $1 million or less. The majority of the bank’s consumer portfolio is composed of residential mortgages, many of which are tied to the business owners who are already clients on the commercial side of the business. Zions has historically struggled to earn high returns on equity over the past decade. While the bank did not perform as poorly as the worst banks during the crisis, Zions did not outperform, either. Net charge-offs spiked above 2% for multiple years and the bank recorded sizable losses on collateralized debt obligation investments. Going forward, management is focused on being a positive outlier for the next credit cycle, as the bank has instituted new credit policies and changed the makeup of its loan book. The bank has also struggled with operating efficiency, and this is at least partially due to the bank's lack of fee income, where fees consistently comprise less than a quarter of total revenue. Going forward, the bank is focused on improving the overall efficiency of the bank, and we like the low-single-digit expense growth target, as well as the fact that management compensation is tied to business simplification and expense management. Management is essentially already meeting its longer-term goal of an efficiency ratio below 60%. We expect that this continued expense control along with rising rates would lead to additional gains here.Zions has an advantage in its deposit base, with a high percentage of noninterest-bearing deposits and relatively advantaged deposit betas. This, along with the fact that roughly 65% of the bank’s loan portfolio tends to reset pricing in 12 months or less, means that Zions will benefit more than the average bank from continued increases in interest rates. However, we agree with management that the pace of net interest margin expansion will slow down from here.