Zions Bancorporation (ZION - Free Report) and its subsidiary’s ratings have been affirmed by Moody’s Investors Service, the rating arm of Moody’s Corporation (MCO - Free Report) . The outlook for the company has been upgraded to positive from stable.
Zions’ senior unsecured rating has been affirmed at (P)Baa3. Its subsidiary’s Baseline Credit Assessment (BCA) stands at baa2 while its issuer rating has been affirmed at Baa3.
The ratings have been affirmed on the basis of the company’s strong capital position as well as good asset quality. Furthermore, improving profitability makes Zions well positioned for future growth, which is an added positive for the company.
On the asset quality front, Zions has successfully reduced the amount of problem loans from its balance sheet. Its exposure toward energy loans has been reduced to almost 4% of total loans at the end of 2017 compared with 8% as of Dec 31, 2014. As a result, its net charge-offs and allowance for credit losses have been declining since the past few quarters. Moreover, with stress in energy portfolio gradually diminishing and no longer a concern, the company’s asset quality is expected to further improve in the future, driven by an improving economy.
Notably, Zions’ efforts to restructure its balance sheet also seem impressive. Given the low-cost deposits and an asset-sensitive balance sheet, the company is well positioned for improvement in profitability, going forward. Its non-interest deposits as a percentage of total deposits have been on the rise since the past six years, from 38.4% in 2012 to 45.4% in 2017. Thus, Zions’ initiatives to efficiently deploy the capital generated from these deposits and the growth in loan demand are expected to support top-line growth in the quarters ahead.
The expectation of sustainability of these above-mentioned improvements is a major reason that made Moody’s upgrade the company’s outlook from stable to positive. Along with this, Moody’s also expects the enhancement and integration of Zions' risk management to cause less volatility in its performance through economic cycles.
Notably, in November 2017, Zions envisioned merging its parent company into its banking subsidiary, with the aim of simplifying corporate structure and streamlining business operations. The main motive behind this was to receive approval from the Financial Stability Oversight Council ("FSOC") to get the "systemically important" regulatory label removed from its name.
Recently, the FSOC decided to accept Zions' appeal and hence grant permission to remove the "systemically important" tag upon the completion of the merger in September, after receiving final approval by shareholders.
Now, Moody's will consider the impact of these organizational and regulatory changes on Zions’ risk governance and its financial policies.
Notably, Zions has been exempted from being subject to the Federal Reserve's stress tests in accordance with the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which was passed in May. Thus, the exemption provides the company financial flexibility to announce capital deployments. Nonetheless, the company published the results of its internal, as well as the Fed’s stress test, which indicate a strong balance sheet position. The bank has been reducing preferred equity to further augment the return on equity and shrink fixed charges. Given the robust capital position, the company is expected to sustain its capital deployment activities, thereby, continuing to enhance shareholder value.
What Could Move the Ratings Up?
According to Moody's, Zions’ ratings can be upgraded if its risk management is sufficiently enhanced and integrated within its strategic decision-making in order to sustain its performance improvement.
Factors That Could Cause a Rating Downgrade
Zions’ ratings can be downgraded if there is a reoccurrence of asset concentrations or a significant decline in capital, or deterioration in asset quality.
Zions’ shares have gained 5% so far this year, underperforming the industry’s growth of 9.2%.
Currently, Zions carries a Zacks Rank #3 (Hold).
Stocks to Consider
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Guaranty Bancorp (GBNK - Free Report) currently carries a Zacks Rank #2 (Buy). In the past 30 days, the Zacks Consensus Estimate for the company has remained stable for the current year. Its shares have gained 18.1% in the past year.
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