We have maintained our 'Neutral' recommendation on
), reflecting no dilution in shareholders value following the
repayment of Troubled Asset Relief Program (TARP) money. However,
we remain concerned about the prevailing low interest rate
environment, sluggish economic growth, the company's asset
sensitive balance sheet, losses related to CDO exposure and
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. Similarly, in
March, another major regional bank,
Regions Financial Corp.
) repaid $3.5 billion of TARP dues. The full repayment of $1.4
billion of TARP dues relieve Zions of a huge financial obligation
and will enable it to enhance its capital ratios as well as
stabilize its balance sheet.
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 a continuous reduction in
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 to decline going forward, resulting from
reductions in loan balances in categories that have exhibited
higher loss rates.
In addition, acquisitions have played a major role in Zions' growth
story. Over the last several years, the company has acquired nearly
30 banks and thrifts, along with a handful of insurance brokers and
other financial service businesses. We believe that the company
would not be averse to inorganic growth once its near-term concerns
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 repricing
schedule of the loans and the continued conversions of debt into
preferred equity will keep NIM under pressure over the next several
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 future loan growth
might be funded from alternative higher-cost funding sources.
Zions currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
REGIONS FINL CP (RF): Free Stock Analysis
ZIONS BANCORP (ZION): Free Stock Analysis
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