Zions Is 'Just About To Turn The Corner'; FBR Upgrades To Outperform

Zions Bancorp’s ZION ROTCE could improve from 5.3 percent in 1Q15 to about 9 percent over the next 12 to 18 months, backed by cost-cutting efforts, the sale of CDOs, and the redeployment of capital, FBR’s Paul J. Miller said in a report. He upgraded the rating for the company to Outperform, while raising the price target from $30 to $36.

“We view this as an opportunity to buy shares around book value with little downside should the company not achieve its targets,” analyst Paul Miller commented.

Cost Reduction Plans

Management would be disclosing its plans to reduce expenses in the next two to three months. Miller expects Zions to target a 65 percent efficiency ratio, with cost cuts probably targeting operational efficiencies as well as streamlining the overall expense base. Expenses could decline to around $385 million per quarter starting in FY16, from the current $400 million run-rate.

Related Link: Barclays Weighs In: Zions Bancorp's Capital Plan Looks Solid, Raises Estimates

Redeployment Of Capital

Zions is likely to sell its CDO portfolio in 2016, freeing up roughly $500 million of capital for redeployment. The analyst believes management could use the capital for share buybacks, securities purchases and loans. He added, “Along with the expense savings, the capital deployment should get the ROEs up to 8.5% in the longer term.”

Zions is also poised to benefit from an increase in the SIFI buffer and/or higher rates. Both of these would help the company realize its efficiency goals much faster than expected, lending upside to the earnings estimates, Miller mentioned.