Mixed Thoughts on Zions - Analyst Blog

Recently we issued an updated research report on Zions Bancorp. ZION. While reduced net interest margin and sluggish loan demandcreate headwinds on the revenue front, shareholders' confidence is buoyed by a stable capital position.

Moreover, Zions has delivered positive earnings surprise in 3 of the last 4 quarters with an average beat of 10.1%. The company's fourth-quarter earnings were in line with the Zacks Consensus Estimate but lagged the year-ago quarter number by 4.5%.

Results suffered due to 16.9% year-over-year decline in the top line against higher expenses. Capital as well as profitability ratios deteriorated in the reported quarter. Nevertheless, higher recoveries and growth in loans and deposits served as tailwinds for the quarter. Further, credit quality was a mixed bag.

Moreover, the regulatory amendments faced by Zions now require the U.S. banks to set aside more capital as buffer, in case of unexpected losses, directly challenges the company's lending and investment capacity, overall hampering margins and profitability. As well, higher proportion of risky assets may put the company in a tight spot.

Nonetheless, debt modifications and improving non-interest demand deposits have been reducing pressure on Zions' balance sheet and boosting return on equity. The recent divestiture of a part of collateralized debt obligations (CDOs) and resubmission of its capital plan to the Federal Reserve has further increased the likelihood of the second dividend hike since the financial crisis.

Additionally, despite escalating credit costs, Zions has been witnessing stable capital ratios, all well above the regulatory requirements. Management also expects consistent improvement in the credit quality going forward.

Key Picks in the Sector

While Zions carries a Zacks Rank #3 (Hold), some top-ranked stocks in the banking sector include Preferred Bank PFBC, Summit State Bank SSBI and Sierra Bancorp BSRR. All these stocks bear a Zacks Rank #1 (Strong Buy).