Zions Stays Neutral

We continue to maintain our long-term “Neutral” recommendation on Zions Bancorp. (ZION - Analyst Report). We are impressed with Zions’ significant turnaround (the company returned to profitability after almost two years), as well as its successful enhancement of capital ratios, and believe that its cost control efforts will drive future growth. However, the company’s near-term outlook remains cautious as the loan demand is likely to remain weak, with continued revenue headwinds, as well as persistent legal and regulatory challenges.

Zions is located in some of the highest-growth markets in the U.S., where the population growth is faster than the rest of the country. Also, most of its markets have a higher per capita income than the national average. Such factors are expected to increase Zions’ market share in the foreseeable future.

Additionally, an improving credit quality remains one the major strengths of Zions. Furthermore, the company anticipates credit costs to trend low for the next several quarters owing to continuous loan balance reduction in loan categories that have exhibited higher loss rates.

Also, lower credit costs will lead to stable-to-declining non-interest expenses in the upcoming quarters. This will likely enhance Zions’ bottom line, considering management’s attempts to improve loan production.

However on the flip side, we anticipate that a constant deposit pricing pressure, along with a growth in higher-cost funding accounts, would weigh on Zions’ net interest margin, thus creating headwinds on the revenue front.

Further, with management expecting deposit growth to lag loan growth, we believe that core deposits could cause a negative mix shift over the time. Also, a part of Zions’ future loan growth could be funded from higher-cost funding sources.

Additionally, as Zions’ capital ratios are way below the minimum Basel 3 requirements, TARP repayment will not be possible until the company complies with the Basel rules. Also, Zions has been issuing stock to maintain its capital ratios, which might lead to a continued risk of equity dilution going forward.

Zions currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, City National Corp. (CYN - Snapshot Report), one of the company’s closest peers, retains a Zacks #3 Rank.

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