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Moody's to Upgrade Zions' Ratings?

MCO ZION

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Moody's Investors Service – the credit rating arm of Moody's Corp. (MCO - Analyst Report) – has placed the ratings of Zions Bancorp (ZION - Analyst Report) and its affiliates on review for a likely upgrade. The main reason behind the possible rise in rating is the company’s plummeting asset concentrations.

Currently, Zions’ subordinated debt is rated ‘B1.’ Moreover, its main operating bank, Zions First National Bank, has a financial strength rating of ‘D+’, which reflects baseline credit assessment of ‘ba1.’ The bank’s financial strength rating of ‘D+’ was affirmed, but its baseline credit assessment of ‘ba1’ will be appraised for promotion.

The long-term deposit rating of Zions bank is ‘Ba1.’ The short-term Not-Prime ratings of Zions bank and other bank subsidiaries were also placed on review. The short-term Not-Prime ratings of Zions were affirmed and are not under review.

Zions’ efforts to reduce asset concentration, which has resulted in lower credit costs and improved profitability, has prompted Moody’s to review its ratings for possible raise. The lower asset concentration stemmed from reductions in construction lending portion of its commercial real estate (CRE) portfolio and improvement in its capital base.

Further, Moody’s will evaluate the efforts that Zions will undertake to ensure that there is no rebuilding of asset concentrations in its portfolio. In addition, Moody’s will assess steps taken by the company to mitigate the concentration risk emanating from its high dependence on net interest income. The review will also focus on Zions' expected long-term performance compared with its peers, particularly due to its franchise positioning.

Moody’s has also placed the long-term ratings of Regions Financial Corp. (RF) on review. Currently, Regions’ holds long-term rating of ‘Ba3’, which is three notches below the investment grade. The company’s efforts of de-risking its profile by lessening exposure to risky commercial real estate and home equity loans, along with strengthening internal controls, has prompted Moody’s to place its ratings on review. 

Further, the company’s efforts to reduce nonperforming assets and tackling the persistent low interest rate environment to keep the top-line growth intact will be supervised.

If Moody’s upgrades Zions’ ratings, it will surely boost investors’ confidence in the stock. Nevertheless, we remain concerned about the prevailing low interest rate environment, sluggish economic growth, the company’s asset-sensitive balance sheet and regulatory pressures.

Zions currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral’ recommendation on the stock.

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