ZIONP - Zions Bancorporation: Let It Fall

Summary

• The banks are seeing immense improvement in their margins, and Zions Bancorporation, National Association Q4 earnings followed the trend.
• Expectations for growth in loan loss provisions are leading to Zions Bancorporation shares falling after the report, but there is a lot to like here.
• Zions Bancorporation asset quality is strong and the bank is more efficient than ever.

We have been covering the banking sector earnings results this season because we believe that they are giving a very clear reading on what to expect for both the economy and the markets a whole. In short, we see a mild recession as likely. We believe yields on loans will continue to improve while competition for deposits will only grow. While net interest margin exploded wider, margin expansion should stall as costs of funds catch up to rates some and banks get more competitive for deposits. Banks are also preparing for losses on loans this year.

Overall, the picture is mixed, with not clear signs of improvement. In late summer and early fall of 2022, we strongly encouraged our members to start buying financials . Make no mistake, shares of many banks have been in rally mode for about three months. Higher interest rates have really been boosting margins and net interest income per loan. We believe banks, and especially those that are more regionally focused, will continue to enjoy tailwinds for many quarters thanks to the return of higher rates, though banks will soon have to pay much more on deposits if they are not already. Even with the threat of a looming recession, banks are now well-positioned for growth over the next few years.

Today we continue our bank coverage with Zions Bancorporation, National Association ( ZION ). The bank just reported its fiscal Q4 earnings . This is a bank doing business with consumers and businesses in the western U.S. largely, operating in 11 states. This bank is operationally healthy and pays a solid 3.2% yield , with room for increases as operations and earnings expand. We view ZION stock as a buy on a pullback to the $45 range, and believe this market will retrace again and give you a better entry opportunity. Let us discuss the Zions Bancorporation, National Association's just-reported Q4 earnings.

Headline earnings beat estimates

Zions Bancorporation's headline numbers were strong in the quarter. There was growth on both the top and bottom lines. Zions Bancorporation, National Association reported a top line growth of 17.5% to $883 million, surpassing consensus estimates by $11.2 million. The solid increase in revenues year-over-year, however, was offset by loan loss provisions being built up. But with higher rates, there was strong net interest income. Overall, Zions Bancorporation reported net interest income of $720 million for the quarter compared to net interest income of $663 million a year ago. On a per share basis, overall net income was $1.84 this quarter, up from $1.34 last year, and up from $1.40 in the sequential Q3.

Loans grow, deposits dip slightly

Loans are up from Q3 and from a year ago. Growth in loans and deposits is key for any bank to see longer-term growth. Total loans were up 3.2% from the start of the quarter, and now total $55.7 billion. Despite the rising rate environment, loan demand for loan products remained strong. However, with strong competition for deposits, there was a slight dip in period-end deposits. Total deposits came in at $76.2 billion at quarter-end, down 5.7%.

The thing is that for banks, getting new deposits is becoming harder with higher rates and banks competing with each other with higher APYs for customer dollars. But with higher rates on new loans, margins should be expanding.

Margins widened

As we move forward in 2023, the cost of funds is on the rise for banks as they have to pay more on deposits. Cost of funds here was just 0.2%, but is on the rise. Coupled with the big yields on loans, net interest margin widened to 3.53% versus 2.58% a year ago. The margins were also up from the sequential Q3, which was 3.24%. While new loans are going out at a higher rate, the impact was offset by the higher costs of funds somewhat, but margins continue to be strong. We predict margins will remain well over 3.5% in coming quarters. For Zions Bancorporation, National Association, see both the cost of funds and the yield on the loan portfolio both continuing to increase in 2023.

Return metrics are strong

We continue to keep a close eye on the return metrics for all the banks. We need to know whether the return on average assets and return on average equity are improving. The return on average assets actually expanded to 1.27% from 0.97% a year ago, while the return on average equity expanded to 16.9% from 13.2%. Further, the bank became more efficient, with the efficiency ratio improving dramatically to 52.9% from 57.6% in Q3. In fact, the efficiency ratio improved all year long, each and every quarter. This bank is a winner.

Asset quality continues to strengthen

The asset quality metrics are also strong here, and we expect this will continue for Zions Bancorporation as rates rise even more in 2023, and new loans are made. The loan loss provision continues to increase as the bank prepares for delinquencies. Loan loss provisions were $43 million, up from $25 million a year ago. This was actually down from $71 million in the sequential quarter, however.

Zions Bancorporation did indicate they will continue to build these reserves, and this is why the company is seeing its stock fall after hours. But asset quality remains strong. Nonperforming assets decreased to 0.26% of total assets, a big improvement from 0.31% of all loans to start the quarter. Further, there were net recoveries of 0.02% of loans, versus 0.21% of loans being charged-off a year ago. This is strong.

Final thoughts

This was a good quarter for Zions Bancorporation, National Association. ZION is an attractive stock if it can pull back to $45 or less. The market rocketed higher recently, but we think it will retrace. We continue to think there is room for the ZION dividend to grow, and believe margins will remain strong in 2023. Asset quality is strong. Loans are growing, and Zions Bancorporation, National Association is the most efficient it has been in recent memory.

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