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Zions Ratings Upgraded by Moody's, Outlook Lowered to Stable

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Zions BancorporationZION issuer, and long-and short deposit ratings have been upgraded by Moody’s Investor Service — the rating division of Moody’s Corp. MCO. This followed the upgrade of the bank’s baseline credit assessment (BCA) to baa1 from baa2.

Zions’ issuer ratings have been upped to Baa2 from Baa3, while long- and short-term deposit ratings were upgraded to A2/Prime-1 from A3/Prime-2. Further, the company’s counterparty risk and long-term counterparty risk assessment ratings are now A3(cr) and Baa1, respectively.

Additionally, the rating agency reiterated Zions’ short-term counterparty risk assessment at Prime-2(cr) and short-term counterparty risk rating at Prime-2. Notably, Moody’s changed the company’s outlook to stable from positive.

Reasons for Ratings Upgrade

Moody’s upgraded the ratings on the back of Zions’ robust asset quality, strong balance sheet position and on anticipation of sustainability of its financial performance. The rating agency expects these strengths, along with management of its asset concentration, to help lower earnings volatility in the long run.

The rating agency observed that over the past several years, Zions has been able to keep “its commercial real estate (CRE) loan portfolio equal to just less than twice its Moody's tangible common equity (TCE) and the construction component, which was a source of outsized losses, equals only 50% of TCE or 7% of loans at year-end 2018.” Additionally, the company’s average loan growth has been conservative.

These efforts have resulted in strong credit quality for Zions. The rating agency stated that even with significant energy exposure, which had led to some deterioration in the company’s asset quality in 2016, overall performance has remained strong.

Further, Moody’s believes that Zions’ pre-provision earnings will likely be sustainable over the next 12 to 18 months, despite slight pressure on net interest income and net interest margins owing to no future rate hike expectations. Also, the company has been able to manage deposit costs, with support from non-interest-bearing deposits. The company continues to manage expenses well amid ongoing technology investments.

Moreover, Zions’ capital ratios remain impressive. Nonetheless, Moody’s expect that the company’s high payout ratio will lead to lower capitalization.

What May Lead to Change in Ratings?

According to Moody's, the BCA and ratings can be upgraded if Zions is able to achieve better capitalization, asset risk and profitability compared to its peers.

Zions’ ratings and the BCA can be downgraded if there is a reoccurrence of asset concentrations or a significant decline in capital, or deterioration in asset quality. Also, rise in funding costs and lower liquidity levels can be reasons for downgrade.

Our Take

Business simplifying efforts, consistent growth in loans and deposits, efforts to improve operating efficiency and higher interest rates will continue supporting Zions’ profitability. Also, regulatory nod for the removal of the SIFI label is a major positive, and provides financial flexibility to the company.

Shares of Zions have rallied 8.6% so far this year, underperforming the industry’s rise of 10.8%.

Currently, Zions carries a Zacks Rank #3 (Hold).

Stocks to Consider

Earnings estimates of Sierra Bancorp (BSRR - Free Report) for 2019 have witnessed an upward estimate revision over the past 60 days. Also, the stock has rallied 6.8% so far this year. It has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TriCo Bancshares’ TCBK earnings estimates for the current year have been upward over the past 60 days. The shares of this Zacks Rank #2 company has rallied 14.4% so far this year.

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