A month has gone by since the last earnings report for Zions (ZION). Shares have added about 2.5% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.
Zions Q3 Earnings Beat Estimates as Revenues Improve
Zions’ third-quarter 2019 earnings per share of $1.17 easily surpassed the Zacks Consensus Estimate of $1.08. Moreover, the figure compared favorably with the prior-year quarter’s earnings of $1.04.
Results benefited from an improvement in revenues along with a marginal decline in expenses. Also, the company’s balance sheet position remained strong. However, it recorded provision for credit losses in the quarter against recoveries in the year-ago period.
Net income attributable to common shareholders was $214 million, down marginally year over year.
Revenues Improve, Costs Decline Marginally
Net revenues for the quarter under review were $713 million, up 1.7% year over year. Moreover, the top line surpassed the Zacks Consensus Estimate of $709.3 million.
Net interest income was $567 million, up marginally from the prior-year quarter. The rise can be primarily attributed to loan growth, and increase in interest and fees on loans, partially offset by higher interest expenses. However, net interest margin contracted 15 basis points (bps) year over year to 3.48%.
Non-interest income amounted to $146 million, up 7.4% from the year-ago quarter. The increase was primarily driven by rise in customer-related fees. Moreover, the company recorded net securities gains in the quarter against net securities losses reported in the year-ago quarter.
Adjusted non-interest expenses were $415 million, down marginally from the prior-year quarter.
Efficiency ratio was 57.3%, down from 58.8% reported a year ago. A fall in efficiency ratio indicates improvement in profitability.
Balance Sheet Strong
As of Sep 30, 2019, net loans held for investment were $48.3 billion, up from $48.1 billion recorded at the end of the prior quarter. Total deposits were $56.1 billion, up from $54.3 billion recorded at the end of the second quarter.
Credit Quality: A Mixed Bag
The ratio of non-performing assets to loans and leases as well as other real estate owned shrunk 16 bps year over year to 0.48%.
However, net loan and lease charge-offs were $1 million at the end of the reported quarter against recoveries of $1 million in the prior-year quarter. Further, provision for credit losses was $10 million against recoveries of $11 million in the year-earlier quarter.
Capital Ratios Deteriorate, Profitability Ratios Mixed
Tier 1 leverage ratio was 9.3% as of Sep 30, 2019, compared with 10.5% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 11.4%, down from 13.1% in the year-ago quarter.
At the end of the third quarter, return on average assets was 1.25%, down from 1.33% as of Sep 30, 2018. However, as of Sep 30, 2019, return on average tangible common equity was 14.2%, in line with the year-ago quarter.
During the quarter, Zions repurchased $275 million worth of shares.
Net interest income is expected to decrease marginally in the next 12 months on assumptions of rate cuts and a slight decline in securities portfolio balances.
Customer-related fees (excluding securities gains and dividends) are expected to be stable with the third-quarter 2019 level.
Loan balance is anticipated to marginally rise over the next 12 months. This is likely to be driven by moderate to robust growth in 1-4 family, municipal, C&I, and owner-occupied loans as well as stable to moderate increase in Oil & Gas and CRE loans.
Adjusted non-interest expenses are expected to be stable or slightly down over the next 12 months. This excludes the impact of roughly $25 million of severance charges to be incurred in fourth-quarter 2019.
Severance charges will be incurred in relation with the company’s plan to lower workforce by 5% along with other efficiency-related cost accelerations and branch closure charges.
The company expects to achieve an efficiency ratio of below 60% for 2019.
Increase in loan loss provisions is projected to be modest in the next 12 months.
How Have Estimates Been Moving Since Then?
Since the earnings release, investors have witnessed an upward trend in fresh estimates.
At this time, Zions has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Zions has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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