EUR 850.00 For Business Accounts Only

Morningstar | We Expect Falling Rates to Challenge Zions' Profitability

Zions Bancorporation is one of the smaller regional banks we cover, with less than $75 billion in assets. Although Zions struggled during the financial crisis and the early years afterward, it has made meaningful improvements to its credit and operational efficiency. We think the main determinants of the bank’s success are the interest-rate environment, the ability to maintain and improve operational efficiency gains, and the capacity to control credit costs.Zions is primarily a commercial bank focused on small to midsize businesses in the western half of the United States. Roughly three quarters of the bank’s loan book is backed by a commercial enterprise or commercial real estate. These loans tend to be among the fastest loans to reprice in a changing interest-rate environment and make the bank quite asset-sensitive. Further, many of these commercial depositors have non-interest-bearing accounts, with pricing based on the full relationship. This gives Zions an attractive deposit base, but it still lacks substantial fee income, which will expose the bank if rates decline.Zions has historically had one of the worst efficiency ratios in our bank coverage. This has partially been due to a bloated expense base, but declining interest income in a low-interest-rate environment didn't help. In 2015, management announced a plan to improve efficiency ratios from the mid-70s to the low 60s in three years and has since achieved this goal. The rising interest-rate environment did help, but we have been impressed by the bank’s real expense control too. We now expect a falling rate environment, which would move the denominator of the efficiency ratio against Zions.Zions has taken steps to improve its credit since the financial crisis. The bank was previously quite exposed to commercial real estate as well as oil and gas, which led to relatively high charge-offs during the crisis. Zions hired a new chief risk officer to improve this and has reduced the risk in its loan portfolio by diversifying away from these types of loans. We think the bank’s low level of charge-offs during the recent energy downturn is an encouraging sign, and the bank could outperform here in the future.