2023-06-12 02:36:17 ET
Summary
- Zions Bancorporation's shares revalued lower after the collapse of Silicon Valley Bank.
- However, the bank's deposit base only declined slightly, suggesting depositors view it as stable, and it has a strong liquidity position.
- ZION is trading at a significant discount to its 1-year average P/B ratio, offering investors material recovery potential.
Shares of Zions Bancorporation, National Association ( ZION ) revalued lower sharply doing the March sell-off in the U.S. community banking market which was driven by the collapse of Silicon Valley Bank. However, the regional bank has only seen a relatively small draw-down in deposits in the first-quarter due to heightened stress levels in the sector and the bank has more than enough liquidity to fund the withdrawals of all its uninsured deposits. I believe the situation in the regional banking market has greatly stabilized and since Zions Bancorporation's shares continue to trade at a price significantly below its 1-year average P/B ratio, a continual improvement in the bank's operating conditions should translate to revaluation upside.
Zions Bancorporation's deposit and liquidity situation
According to the Federal Deposit Insurance Corporation, American financial institutions lost $472B , or approximately 2.5% of their deposits between Q4'22 and Q1'23. The first-quarter of FY 2023 saw a number of bank runs on financial institutions, especially in the community banking market, where depositors saw the greatest risk of insolvency. The first-quarter was also the fourth consecutive quarter in which deposits declined in the market as investors shifted funds from bank deposits to higher-yielding money market funds.
However, given the stress levels experienced in the community banking market in March especially, Zions Bancorporation's average deposit base declined only slightly: its average deposits decreased 5.5% quarter over quarter to $70.2B while end-of-period deposits declined only 3.4%.
More than half (55%) of Zions Bancorporation's deposits were insured at the end of the first-quarter. At the end of Q1'23, ZION Bancorporation held $69.2B in deposits, 53% of which related to the commercial sector… a sector that was especially likely to withdraw funds from banks during the March crisis. Not including collateralized deposits, Zions Bancorporation had $28.6B in uninsured deposits at the end of the first-quarter.
Companies with large deposit balances at community banks have shifted funds over to top tier banks such as Bank of America ( BAC ) or JPMorgan Chase ( JPM ) which are systemically-important banks and were therefore perceived as a safer destination for deposits.
However, Zions Bancorporation only lost a very small percentage of its deposit base to withdrawals in the first quarter . The Fed made an emergency liquidity window available to the U.S. depositary institutions during the crisis, called the Bank Term Funding Program, which can be credited for preventing a much worse liquidity crisis in the community banking market. By pledging collateral such as U.S. Treasuries or mortgage-backed securities, U.S. depositary institutions could access short-term funding from the Fed in order to fund deposit withdrawals.
Like most banks in the sector, ZION has improved its liquidity situation in order to be able to fund deposit withdrawals. The bank had available liquidity of $38B at the end of Q1'23, including $7.3B from the Fed's Bank Term Funding Program, which is more than enough to cover the bank's $28.6B in uninsured deposits (less collateralized deposits). Therefore, Zions Bancorporation could cover 133% of its uninsured deposits if a deposit run were to occur.
ZION's valuation compared to other regional banks
ZION is not trading at the largest discount to book value: banks like PacWest Bancorp ( PACW ) and Western Alliance Bancorporation ( WAL ) are trading a much larger discounts to book value (of 55% to 18%) as they have seen larger deposit outflows during the peak of the financial crisis in March.
ZION is currently trading at a price-to-book ratio of 0.96X which is 34% below the bank's 1-year average price-to-book ratio of 1.47X. If the market were to value the bank again at 1.47X book value, then ZION could be a $47 stock (based off of a Q1'23 book value of $32.03 per-share), implying 53% revaluation potential to the upside.
Risks with ZION
If more banks fail going forward, the U.S. banking system may have to deal with a new crisis which could translate to Zions Bancorporation losing a larger share of its deposits. Higher interest rates continue to pose a risk for banks in general as well as depositors have an incentive to move funds into higher-yielding investment alternatives, such as money market funds. A recovery of deposits in the second-quarter, however, would likely be a catalyst for upside revaluation.
Final thoughts
We haven't seen any bank failures since the collapse of First Republic Bank at the beginning of May which I believe is a good indication that the market is moving on from the community banking crisis. The deposit situation for most community banks has stabilized after March 20, 2023 and ZION itself has only lost a relatively minor portion of its deposit base in the first-quarter. Considering that the Fed's emergency liquidity window has been enormously successful and prevented a worse crisis, I believe investors can still find huge value in the community banking market as a whole. Since ZION continues to trade at an excessively large discount to its 1-year average P/B ratio, I believe ZION offers investors significant (~53%) recovery potential.
For further details see:
Zions Bancorporation: Strong Recovery Potential