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Why Is Zions (ZION) Up 2.1% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Zions Bancorporation (ZION - Free Report) . Shares have added about 2.1% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Zions' Q1 Earnings and Revenues Surpass Estimates

Zions reported first-quarter 2017 earnings of $0.61 per share, surpassing the Zacks Consensus Estimate of $0.54. Moreover, the figure was significantly higher than $0.38 earned in the prior-year quarter.

The results largely benefited from top-line growth and decline in provisions, partially offset by higher adjusted non-interest expenses. While loan and deposit balances showed slight improvement, credit quality displayed a mixed picture.

Net income applicable to common shareholders came in at $129 million, up 63.3% from the year-ago quarter.

Revenues Rise, Costs Escalate

Net revenues (FTE basis) were $621 million for the quarter, up 8.9% year over year. Moreover, the figure marginally beat the Zacks Consensus Estimate of $620 million.

Net interest income increased 7.9% year over year to $489 million. The rise was mainly attributable to higher interest income and lower interest expenses. Further, net interest margin improved 3 basis points (bps) year over year to 3.38%.

Non-interest income amounted to $132 million, up 12.8% from the year-ago quarter. The improvement reflected an increase in all fee income components except loan sales and servicing income.

Adjusted non-interest expenses increased 3.8% from the year-ago quarter to $411 million. However, efficiency ratio was 65.9%, down from 68.5% a year ago. A fall in efficiency ratio indicates an improvement in profitability.

Healthy Balance Sheet
    
As of Mar 31, 2017, total loans, net of allowance, increased 0.3% from $42.2 billion at the end of the prior quarter. Also, total deposits rose 0.4% sequentially to $53.5 billion due to a temporary increase in client activity during the quarter end.

Mixed Credit Quality

The ratio of nonperforming lending-related assets to net loans and leases as well as other real estate owned increased 4 bps year over year to 1.37%. Further, net charge-offs were $46 million, up from $36 million from the year-ago quarter.

However, the provisions for loan losses fell 45.2% from the year-ago quarter to $23 million.

Capital Ratio Deteriorates, Profitability Improves

Under the Basel III rules, Tier 1 leverage ratio was 10.8%, as of Mar 31, 2017, down from 11.4% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 13.6% compared with 13.9% at the end of the year-ago quarter.

Return on average assets was 0.88% as of Mar 31, 2017, up from 0.62% as of Mar 31, 2016. Also, as of Mar 31, 2017, tangible return on average tangible common equity was 8.8%, up from 5.6% a year ago.

Outlook

Management projects adjusted pre-provision net revenue to continue improving in the near term, driven by expense controls and active balance sheet management.

Management expects net interest income to rise at mid to high single-digit range in 2017, driven by continued growth in loans and securities as well as benefit from rate hikes while a slight rise in funding costs is expected to hurt to some extent.  Notably, the projection does not take into assumption further rate hikes.

In 2017, net interest margin is expected to benefit from the rate hikes in Dec 2016 and Mar 2017.

The company expects to maintain its securities portfolio at approximately the first-quarter 2017 level in the near term.

Further in 2017, non-interest income (excluding dividends and securities gains/losses) is projected to increase at mid-single digit rate.

Zions expects adjusted non-interest expense to increase 2–3% year over year in 2017. The rise is expected to be a result of continued spending on technology systems overhaul, increase in technological expenditure and normal salary adjustments. The rise in expenses is expected to be partially offset by the cost saving efforts. Nonetheless, it remains committed to drive efficiency ratio to low 60s.

Management expects effective tax rate to be in the range of 34–35% in 2017, assuming no changes to the corporate tax rate.

Preferred dividends are expected to be approximately $12.4 million in second-quarter 2017 and $37 million for the next four quarters. By the first half of 2017, management expects preferred equity to reduce $144 million. Further, an increase in the count of diluted shares is expected to increase on account of warrant dilution, partially offset by share buyback.

Over the next four quarters, loan balance is expected to increase moderately, largely driven by strong growth in residential mortgage, marginal growth in non-O&G construction & industrial, construction and land development (C&D) and term commercial real estate (CRE) portfolio. These will be partially offset by attrition in O&G and National Real Estate loan portfolios.

Notably, provision for credit losses is expected to be stable, on the assumption that energy prices remain at the current level. The company also expects O&G loan losses to decline substantially over the next 12 months on a year-over-year basis.

For 2017, net charge offs for non-O&G portfolio is expected to increase slightly on a year-over-year basis, assuming that the recoveries may not be substantial.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been nine moves up in the last two months.

Zions Bancorporation Price and Consensus

 

Zions Bancorporation Price and Consensus | Zions Bancorporation Quote

VGM Scores

At this time, Zions' stock has an average Growth Score of 'C', however its Momentum is doing a bit better with a 'B'. Following the exact same course, the stock was allocated also a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and momentum investors than growth investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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