Morningstar | Zions Has Decent 2Q, but We Expect Rate Cuts to Challenge Profitability
No-moat-rated Zions Bancorp reported a decent second quarter in a challenging operating environment, as the highly rate-sensitive bank prepares for interest-rate cuts. Earnings per share grew 11.2% on revenue growth of 0.9%, as share repurchases and expense controls counteracted slower top-line growth. Return on tangible equity came in at a respectable 12.7%. On the top line, strong 6.8% loan growth partially offset a 14-basis-point decline in net interest margin from the previous quarter. This is among the highest NIM declines that we have seen under our bank coverage this quarter. We now forecast three interest rate cuts through 2020 into our base case, which we anticipate will challenge Zions’ ability to deliver top-line growth. In our view, Zions’ two biggest challenges will be a lack of fee income, which would otherwise cushion the effects of rate cuts, and the fact that its loan book is heavily tied to short-term rates, such as Libor, which have declined in anticipation of federal-funds rate cuts. While we appreciate that Zions has implemented some hedges against declining rates, we think it is still one of the more interest-rate-sensitive banks under our coverage. We expect to reduce our fair value estimate for Zions by 5%-10% as we incorporate rate cuts into our model.Noninterest expenses grew at a muted 0.7% in the second quarter, as the elimination of the FDIC surcharge offset increasing compensation expense. We anticipate that noninterest expense growth will pick up over the medium term since the elimination of the surcharge was a one-time event.
While credit costs picked up slightly, in an absolute sense the net charge-off ratio remained quite low at 12 basis points in the quarter. We expect credit costs to normalize at levels roughly 3 times higher than the current net charge-off ratio.
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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