Zions Earnings: Strong Net Interest Income Performance, Mixed Credit Trends

Key Morningstar Metrics for Zions Bancorporation

• Fair Value Estimate: $56.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Zions Bancorporation’s Earnings

Zions Bancorporation ZION reported a decent second quarter. Net interest income trends were strong and loan growth trends were robust, but credit trends were mixed. Overall, there was little that would alter our long-term view of the firm, and we maintain our fair value estimate of $56 and no-moat rating.

Net interest income of $597 million was up 2% sequentially and 1% from the year-ago period, with net interest margin expansion being the main driver. Net interest margin was 2.98%, up from 2.94% in the first quarter and 2.92% in the year-ago quarter. Deposit pressures are easing slightly, with average deposits up sequentially, though the shift from non-interest-bearing to interest-bearing deposits continues. Securities are repricing upwards. Average interest-earning assets, which were up 0.6% sequentially but down 0.5% from the year-ago quarter, are mostly holding steady. We view this as a good result, as some of the bank’s peers are seeing balance sheet shrinkage.

Credit trends were mixed, in our view. On the positive side, net charge-offs of 0.1% were relatively low, and nonperforming loans as a percent of the total were relatively stable sequentially. However, 30–89 days past-due loans increased, and classified and criticized loans saw meaningful increases. Classified loans increased $298 million sequentially, driven by the commercial portfolio, and criticized loans increased $284 million sequentially due to downgrades in the commercial real estate portfolio, including multifamily.

Overall, we expect credit losses to be manageable over the next few quarters, but we believe the increase in classified and criticized loans is something to keep an eye on. On the positive side, the firm’s commercial real estate portfolio, which represents 23% of its loans, is diversified. Multifamily, industrial, and office are its three largest categories, with 28%, 23%, and 14% of its commercial real estate book, respectively.