A month has gone by since the last earnings report for Zions (ZION). Shares have added about 0.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Zions due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Zions Q3 Earnings & Revenues Beat, Expenses Stable
Zions’ third-quarter 2018 earnings of $1.04 per share handily surpassed the Zacks Consensus Estimate of 96 cents. Also, the figure compares favorably with the prior-year quarter’s earnings of 72 cents.
Results, to a great extent, benefited from improvement in net interest income, provision benefit and stable operating expenses. Also, the quarter witnessed a strong balance sheet position. However, higher adjusted non-interest expenses and decline in non-interest income were the headwinds.
Net income attributable to common shareholders was $215 million, indicating a jump of 41% year over year.
Revenues Improve, Costs Stable
Net revenues came in at $701 million, increasing 9% year over year. Also, the top line beat the Zacks Consensus Estimate of $699.9 million.
Net interest income was $565 million, up 8% from the prior-year quarter. The rise was primarily attributable to loan growth and increase in interest and fees on loans, partially offset by higher interest expenses. Further, net interest margin rose 18 basis points (bps) year over year to 3.63%.
Non-interest income amounted to $136 million, down 2% from the year-ago quarter. The decrease was mainly due to lower other revenues as well as securities losses.
Adjusted non-interest expenses were relatively stable year over year at $416 million.
Efficiency ratio was 58.8%, up from 62.3% reported a year ago. A fall in efficiency ratio indicates improvement in profitability.
Strong Balance Sheet
As of Sep 30, 2018, total net loans came in at $45.3 billion, up 1% from the end of the prior quarter. Total deposits were relatively stable sequentially at $53.8 billion.
Credit Quality Improves
The ratio of non-performing assets to loans and leases as well as other real estate owned decreased 42 bps year over year to 0.64%. Also, net loan and lease recoveries were $1 million against charge-offs of $8 million in the prior-year quarter.
However, provisions for credit losses were a benefit of $11 million compared with provision of $1 million in the year-ago quarter. Provision benefit largely indicates net recoveries and ongoing improvements of credit quality metrics in the entire loan portfolio.
Capital Ratios Deteriorate, Profitability Ratios Improve
Tier 1 leverage ratio was 10.5% as of Sep 30, 2018, compared with 10.6% in the prior year quarter. Tier 1 risk-based capital ratio was 13.1%, down from 13.3% in the year-ago quarter.
At the end of the July-September quarter, return on average assets was 1.33%, up from 0.97% as of Sep 30, 2017. Also, as of Sep 30, 2018, tangible return on average tangible common equity was 14.2%, up from 9.8% a year ago.
During the reported quarter, Zions repurchased $185 million worth of shares.
Management expects pre-provision net revenue growth rate to be in the high single digits.
Net interest income has been forecasted to increase moderately in the next 12 months and customer-related fees (excludes securities gains, dividends) are expected to increase slightly.
Loan balance is expected to moderately increase over the next 12 months. This is likely to be driven by moderate to strong growth in 1-4 family, municipal, C&I and owner-occupied loans as well as stable to slight increase in Oil & Gas and CRE loans, partially offset by moderate decline in national real estate loans.
The yield on the securities portfolio is anticipated to move higher at a moderate pace over the next several quarters.
Adjusted non-interest expenses in 2018 are expected to increase at low-single digit rate on a year-over-year basis. Notably, the company is on track to achieve efficiency ratio below 60% in 2018.
The company expects FDIC insurance expenses in the fourth quarter to be nearly $7 million.
Effective tax rate is anticipated to be approximately 23% for 2018.
Loan loss provisions are projected to be in a modest range in the next 12 months. The company expects net charge-offs to be overall low on the assumption of economic conditions remaining generally stable.
Preferred dividends are expected to be $34 million in 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, Zions has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Zions has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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