Wanna Invest In Main Street? Buy Zions Bancorp

Zions Bancorp ZION has got the seal of approval from none other than Bank of America Merrill Lynch. Following its meeting with the president and chief operations officer of Zions Bancorp, Scott McLean, the firm upgraded the shares of the company Neutral to Buy and raised its price target from $50 to $52.

The firm indicated that the new price target implied 15-percent upside, before the dividend.

At the time of writing, Zions Bancorp shares were rallying 0.61 percent to $45.40.

Analysts Erika Najarian attributed the upgrade not to the bank being rate-sensitive, but to two catalysts for earnings per share upside which the market is under-pricing. The analyst believes Zions Bancorp is the top beneficiary of regulatory reform among regionals. Additionally, BofA Merrill Lynch pointed to the continued improvement in efficiency from expense management.

Clarifying further on the rationale for the upgrade, BofA Merrill Lynch said Zions Bancorp is the most over-capitalized bank in its coverage universe, even without regulatory reform, with a common equity tier 1 ratio of 12.3 percent. The firm believes the bank is overcapitalized by 250 basis point or $1.3 billion.

The firm expects the bank to return $1.6 billion to shareholders over the next two years or 20 percent of the market cap.

Meanwhile, the bank has been overhauling its core banking system and is 50 percent through a nine-year project, the firm said. According to the firm, this investment should significantly improve the bank's efficiency to its clients, which is positive for future revenues.

The firm added that these investments are currently in the expense run-rate and that the bank is committed to continued expense management. Specifically, the firm expects expense growth of just 1.6 percent in 2018, implying a 60 percent efficiency ratio compared to 62 percent in 2017.

BofA Merrill Lynch raised its 2018 earnings per share estimate to $3.34, 6 percent above the consensus estimate. This is despite the firm reducing its estimate for the number of expected rate hikes between now and 2018 from four to two. The firm also introduced its 2019 earnings per share estimate of $3.56, which is also above the consensus estimate.