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Zions (ZION) Surges 30% in Q3: What's Behind this Turnaround?
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After a rough start to 2023, Zions Bancorporation (ZION - Free Report) had an astounding comeback in the third quarter. The company’s shares surged 30%, becoming the top-performing S&P 500 bank.
The stock not only comfortably outperformed the industry growth of 7.8% in the three months ended September 2023, but it also substantially outpaced the Zacks Finance sector and the S&P 500 Index.
From the chart below, one can clearly see how the ZION stock performed in the third quarter of 2023:
Performance in Q3
Image Source: Zacks Investment Research
Zions Witnesses Decisive Trend Reversal in Q3
It is a significant turnaround for Zions from earlier this year when the regional banking crisis gripped the markets in March following the collapse of Signature Bank and Silicon Valley Bank. The failure of these two banks (and that of First Republic Bank in May) was mainly triggered by deposit flight.
During the first half of 2023, ZION shares lost 45.5% in value as investor sentiments toward the regional banks turned bearish. The primary investor concern was exposure to uninsured deposits. Shares of several other notable regional banks, including KeyCorp (KEY - Free Report) and Truist Financial (TFC - Free Report) , also plunged over similar concerns.
Shares of KEY tanked 46.9% and TFC was down 29.5% in the first six months of 2023.
With more than 50% of its deposits exceeding the Federal Deposit Insurance Corporation’s $250,000 insurable limit before the crisis began, Zions’ shares witnessed unprecedented investor apathy.
Nonetheless, this Zacks Rank #3 (Hold) stock recorded a solid turnaround following the release of its second-quarter 2023 results. After a 3.4% sequential decline in total deposit balance in the first quarter, the company recorded a 7.4% increase in the second quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This solid rebound in deposit balance led to an optimistic stance, with the shares of Zions jumping almost 43% in July only. It is worth noting that this robust deposit performance dented the company’s net interest income (NII) during the quarter as deposit costs jumped.
Investors remained uninterested in the higher funding costs and focused on the company’s turnaround story as uninsured deposits as a share of total deposits fell to 41% in the second quarter. This positive investor sentiment continued throughout the third quarter as the ZION management worked toward improving its financials.
What Changed in Q3?
At an investor conference in early September, ZION management presented updates for July and August. It showed marked improvement in NII, with July's number being $197 million and August's $199 million. In June, NII was $193 million.
Zions also witnessed a 4.8% jump in average deposits in these two months. The metric grew from $72.7 billion in June 2023 to $75.1 billion in July and $76.2 billion in August. The increase was mainly driven by a higher average interest-bearing deposit balance.
Likewise, Zions’ net interest margin (NIM) expanded in the first two months of the third quarter. NIM was 2.92% in July and 2.96% in August. The metric was 2.91% in June 2023. This improvement in NIM was despite the rise in total cost of deposits, which rose to 1.8% in July and 1.94% in August from 1.6% in June.
These updates showed that Zions will be able to sustain decent NII growth in the third quarter and beyond despite not much change in the operating backdrop over the last couple of months.
Further, Zions reiterated its NII outlook. Management projects NII in the second quarter of 2024 to be stable or slightly decline on a year-over-year basis.
Additionally, the company plans to reduce its workforce by 3% by 2023-end. While it isn’t clear whether this would include attrition, the reductions are expected to be spread across ZION’s geographic and departmental footprints. The cuts will likely be majorly in roles that do not deal directly with customers or generate revenues.
Parting Thoughts
With the Federal Reserve expected to keep the interest rates high for a longer period, the banking sector will continue facing a tough operating backdrop into the next year. The sector faces ambiguity related to new capital regulations and the path of interest rates. Rising deposit costs, weakening credit quality (largely in commercial real estate) and rating downgrades remain primary headwinds.
The reversal witnessed by Zions shows that banks are expected to witness an uphill task to sustain profitability in these unprecedented times.
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Zions (ZION) Surges 30% in Q3: What's Behind this Turnaround?
After a rough start to 2023, Zions Bancorporation (ZION - Free Report) had an astounding comeback in the third quarter. The company’s shares surged 30%, becoming the top-performing S&P 500 bank.
The stock not only comfortably outperformed the industry growth of 7.8% in the three months ended September 2023, but it also substantially outpaced the Zacks Finance sector and the S&P 500 Index.
From the chart below, one can clearly see how the ZION stock performed in the third quarter of 2023:
Performance in Q3
Image Source: Zacks Investment Research
Zions Witnesses Decisive Trend Reversal in Q3
It is a significant turnaround for Zions from earlier this year when the regional banking crisis gripped the markets in March following the collapse of Signature Bank and Silicon Valley Bank. The failure of these two banks (and that of First Republic Bank in May) was mainly triggered by deposit flight.
During the first half of 2023, ZION shares lost 45.5% in value as investor sentiments toward the regional banks turned bearish. The primary investor concern was exposure to uninsured deposits. Shares of several other notable regional banks, including KeyCorp (KEY - Free Report) and Truist Financial (TFC - Free Report) , also plunged over similar concerns.
Shares of KEY tanked 46.9% and TFC was down 29.5% in the first six months of 2023.
With more than 50% of its deposits exceeding the Federal Deposit Insurance Corporation’s $250,000 insurable limit before the crisis began, Zions’ shares witnessed unprecedented investor apathy.
Nonetheless, this Zacks Rank #3 (Hold) stock recorded a solid turnaround following the release of its second-quarter 2023 results. After a 3.4% sequential decline in total deposit balance in the first quarter, the company recorded a 7.4% increase in the second quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This solid rebound in deposit balance led to an optimistic stance, with the shares of Zions jumping almost 43% in July only. It is worth noting that this robust deposit performance dented the company’s net interest income (NII) during the quarter as deposit costs jumped.
Investors remained uninterested in the higher funding costs and focused on the company’s turnaround story as uninsured deposits as a share of total deposits fell to 41% in the second quarter. This positive investor sentiment continued throughout the third quarter as the ZION management worked toward improving its financials.
What Changed in Q3?
At an investor conference in early September, ZION management presented updates for July and August. It showed marked improvement in NII, with July's number being $197 million and August's $199 million. In June, NII was $193 million.
Zions also witnessed a 4.8% jump in average deposits in these two months. The metric grew from $72.7 billion in June 2023 to $75.1 billion in July and $76.2 billion in August. The increase was mainly driven by a higher average interest-bearing deposit balance.
Likewise, Zions’ net interest margin (NIM) expanded in the first two months of the third quarter. NIM was 2.92% in July and 2.96% in August. The metric was 2.91% in June 2023. This improvement in NIM was despite the rise in total cost of deposits, which rose to 1.8% in July and 1.94% in August from 1.6% in June.
These updates showed that Zions will be able to sustain decent NII growth in the third quarter and beyond despite not much change in the operating backdrop over the last couple of months.
Further, Zions reiterated its NII outlook. Management projects NII in the second quarter of 2024 to be stable or slightly decline on a year-over-year basis.
Additionally, the company plans to reduce its workforce by 3% by 2023-end. While it isn’t clear whether this would include attrition, the reductions are expected to be spread across ZION’s geographic and departmental footprints. The cuts will likely be majorly in roles that do not deal directly with customers or generate revenues.
Parting Thoughts
With the Federal Reserve expected to keep the interest rates high for a longer period, the banking sector will continue facing a tough operating backdrop into the next year. The sector faces ambiguity related to new capital regulations and the path of interest rates. Rising deposit costs, weakening credit quality (largely in commercial real estate) and rating downgrades remain primary headwinds.
The reversal witnessed by Zions shows that banks are expected to witness an uphill task to sustain profitability in these unprecedented times.