Is Loss on CDO Sale a Major Threat to Zions' Q2 Earnings? - Analyst Blog

Zions BancorporationZION is scheduled to report second-quarter 2015 results after the market closes on Monday, Jul 20.

Last quarter, Zions outpaced the Zacks Consensus Estimate by 2.8%. Better-than-expected results came on the back of a modest rise in net interest income, slightly lower expenses and provisions credited to earnings. However, a fall in non-interest income was the undermining factor.

Will Zions be able to beat on earnings this quarter as well? Let's see how things have shaped up for this announcement.

What to Expect?

In Jun 2015, Zions divested $574 million in collateralized debt obligation securities to meet requirements under the Volcker Rule. While proceeds from such sale are expected to be modestly accretive to the company's pro forma book value as well as regulatory capital ratios, second-quarter earnings will likely be hit by $137 million of pre-tax losses stemming from the same.

Adding to the company's woes, expenses are anticipated to mount during the quarter, led by elevated technology-related spending and seasonal increases in payroll taxes. Moreover, with management expecting non-interest expenses to remain stable during the year, we foresee muted progress on the expense front this quarter.

In a conference call following the first-quarter earnings release, Zions had noted further credit downgrades related to the company's energy loan portfolio. Based on this, we predict provisions to come into play this quarter and materially dampen its financials. Notably, provisions will rise significantly year over year, as the company had recorded a negative provision of $54.4 million in the second quarter of 2014.

Additionally, Zions is anticipated to witness a silent quarter on the revenue front. The company's net interest income ("NII") and net interest margin ("NIM") have been under considerable strain due to a persistent low interest rate environment, FDIC-supported loan and low-yield loans. And things are not likely to reverse this quarter.

Further, active risk management, along with continued loan run-offs, portrays a softer picture for loan growth. Moreover, the company continues to experience reduced pace of loan growth in Texas and adjoining areas, coupled with volatile prepayments. Absence of a considerable rise in loan balances can adversely impact interest income.

However, fee income, particularly service fees, is projected to trend modestly higher during the quarter. This will likely support top-line growth in the upcoming release.

With no anticipation of either a notable rise in revenue or fall in expenses, the above-mentioned pre-tax loss will act as the most influential factor this quarter, challenging the company's second-quarter earnings.

Zions' activities during the quarter failed to win analysts' confidence. As a result, the Zacks Consensus Estimate has remained unchanged at 39 cents over the past 7 days.

Earnings Whispers

Our proven model does not conclusively show that Zions is likely to beat the Zacks Consensus Estimate in the upcoming release. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for Zions is -5.13%. This is because the Most Accurate Estimate of 37 cents lies below the Zacks Consensus Estimate of 39 cents.

Zacks Rank: Zions' Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

SVB Financial Group SIVB has an Earnings ESP of +4.05% and sports a Zacks Rank #1.

Huntington Bancshares Inc. HBAN has an Earnings ESP of +5.00% and carries a Zacks Rank #2.

Both these companies are scheduled to report second-quarter results on Jul 23.

The Earnings ESP for Cullen/Frost Bankers, Inc. CFR is +3.57% and it carries a Zacks Rank #2. The company is expected to release second-quarter results on Jul 29.

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ZIONS BANCORP (ZION): Free Stock Analysis Report

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SVB FINL GP (SIVB): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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