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Morningstar | Zions Brings a Successful 2018 to a Close, Gains From Here Will Be Tougher

No-moat-rated Zions' fourth-quarter results were largely in line with our expectations. Quarterly earnings per share were $1.08, up dramatically from $0.54 in the fourth quarter of 2017. This brought full-year earnings to $4.08 per share, roughly in line with our expectations of $4.10 per share. The return on assets and return on tangible equity were 1.34% and 14.5%, respectively. This brought full-year returns on tangible equity to a consistent mid-single digit level, a significant improvement over 2017, helped by a normalizing interest environment, tax reform, and expense discipline. We expect that future gains for Zions will be tougher to come by, with much of the boost from rates having already played out, the one time boost from tax reform now over, and a credit cycle that has yet to normalize. We do not expect to be making any material changes to our current fair value estimate based on our initial reaction to earnings, but may alter it slightly as we more fully incorporate the results into our model.

Despite worries of an economic slowdown, Zions saw solid loan growth in the quarter, with average loans up 4% year over year in the fourth quarter, and the annualized growth rate for end of period balances hitting nearly 8%. Growth was broad, although it was particularly strong within C&I loans. While loan growth rebounded strongly in the quarter, management still remains cautious, seeing only slightly to moderately increasing loan balances in 2019. While loans were growing, credit metrics continued to improve. Classified loans continued to fall as a percentage of total loans, as did the proportion of delinquent loans, while provisioning remained rangebound. Zions also gave more detailed disclosures surrounding its leverage loan exposures, which remain below peer levels. This supports Zions’ case that it will switch from an underperformer to an outperformer during the next credit downturn.

Fee income maintained a steady quarterly run rate, coming in at USD 128 million for the quarter. As expected, service charges on deposit accounts and mortgage lending fees remained under pressure, while fees from cards and trust and wealth management income grew. Noninterest expenses were up 1.7% for full-year results, as typical items such as occupancy and compensation increased. The decline in the FDIC insurance premium should help 2019 levels stay fairly flat to up only slightly compared with 2018. This, combined with equal growth in fees plus additional net interest income growth leads us to believe further operating leverage is likely in 2019 for Zions.

Loan growth and expanding net interest margins drove net interest income higher, with net interest income up 8% for full year results. We continue to believe Zions has an extremely valuable deposit base, and deposit betas for the bank remained fairly steady in the fourth quarter at 40%. Even without a single rate hike in 2019, Zions should still have room for some NIM expansion and net interest income growth.

For a more detailed view of our expectations regarding interest rates and their effects on banking profitability, please see our December 2018 Observer, "The Return of the Bank: Net Interest Margins Reach a Turning Point--Funding Advantages and Net Interest Income."