We are maintaining our 'Neutral' recommendation on
) based on the upgraded long-term ratings of the company and its
subsidiaries by Moody's Investors Service - the credit rating arm
) - as well as its better-than-expected third-quarter
performance. However, we remain concerned about the prevailing
low interest rate environment, sluggish economic growth,
asset-sensitive balance sheet, losses related to collateral debt
obligations (CDO) exposure and regulatory pressures.
Zions' better-than-expected third-quarter performance was
attributable to higher net interest income, declining operating
expenses and lower preferred stock dividends. These were
partially offset by lower non-interest income.
In December 2012, Moody's Investors Service upgraded the
long-term ratings of Zions and its subsidiaries, while
reiterating the outlook at "Stable". The rating agency is
impressed with the company's efforts toward continuously
improving asset quality and reducing its risk profile. The rating
revisions are likely to be valuable for Zions as these play a
major role in preserving the investors' confidence in the stock
and help boost creditworthiness in the market.
In September 2012, Zions finally redeemed the remaining 50%
($700 million) of its TARP preferred equity. Earlier in March,
the company had redeemed 50% of the preferred equity. The full
repayment of $1.4 billion of TARP dues relieves Zions of a huge
financial obligation and will enable it to enhance its capital
ratios as well as stabilize its balance sheet, going forward.
Further, improving credit quality continues to be a major
strength for Zions. Management expects continuous improvement in
credit trends in the subsequent quarters due to the constant
reduction in its non-accrual loans, which is expected to push
down net charge-offs and the provision for loan losses. Also, the
company anticipates credit costs to continue declining going
forward, owing to reductions in loan balances in categories that
have exhibited higher loss rates.
On the flip side, we anticipate continuous deposit pricing
pressures, sluggish loan demand and low interest rate environment
along with growth in higher-cost funding accounts to weigh on
Zions' net interest margin (NIM). Though management expects NIM
to benefit from modest loan growth, the maturity and re-pricing
schedule of the loans and the continued conversions of debt into
preferred equity will keep it under pressure over the next
Further, modest core deposit growth could cause a negative mix
shift. Despite marginal improvements in deposits in the first
half of 2012, Zions expects deposit growth to continue to lag
loan growth in the near term. Moreover, a portion of its future
loan growth is likely to be funded from alternative higher-cost
Lastly, Zions' mix of a high level of risky Commercial Real
Estate assets will put the company in a tight spot, at which
raising new capital and removing troubled loans may take
precedence over finding new growth opportunities.
Zions currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating.
MOODYS CORP (MCO): Free Stock Analysis Report
ZIONS BANCORP (ZION): Free Stock Analysis
To read this article on Zacks.com click here.