Why is Zions (ZION) Up 6.8% Since Its Last Earnings Report?

A month has gone by since the last earnings report for Zions Bancorporation ZION. Shares have added about 6.8% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is ZION 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' Q1 Earnings Beat Estimates, Revenues Up Y/Y

Zions earnings for the first quarter came in at $1.09 per share, comfortably surpassing the Zacks Consensus Estimate of 83 cents. Also, the figure compares favorably with the prior-year quarter’s earnings of 61 cents per share.

Results, to a great extent, benefited from improvement in both net interest income and non-interest income. Also, the quarter witnessed overall improvement in credit quality. However, higher adjusted non-interest expenses remained a major headwind.

Notably, net income attributable to common shareholders for the quarter came in at $231 million indicating an increase of 79.1% year over year.

Revenues Improve, Costs Escalate

Net revenues came in at $684 million for the reported quarter, increasing 9.6% year over year. Moreover, the revenue figure surpassed the Zacks Consensus Estimate of $666 million.

Net interest income for the quarter came in at $542 million, up 10.8% year over year. The rise was primarily attributable to increased interest income, partially offset by higher interest expenses. Further, net interest margin expanded 18 basis points (bps) year over year to 3.56%.

Non-interest income amounted to $138 million, up 4.5% from the year-ago quarter. The uptick primarily stemmed from increase in other service charge, commission and fees, as well as wealth management and trust income.

Adjusted non-interest expenses were up 1.9% from the year-ago quarter to $419 million.

Efficiency ratio was 61.3%, down from 65.9% reported a year ago. A fall in efficiency ratio indicates improvement in profitability.

Strong Balance Sheet

As of Mar 31, 2018, total loans, net of allowance came in at $44.9 billion, up 1.3% from the end of the prior quarter. Total deposits inched up 0.8% from the prior-quarter end to $53 billion.

Credit Quality Improves

The ratio of non-performing assets to loans and leases, as well as other real estate owned, shrunk 50 bps, year over year, to 0.87%. Nonetheless, net charge-offs came in at $5 million, tanking 89.1% from the year-earlier quarter.

In the reported quarter, the company registered a provision benefit of $47 million compared with $18 million of provision for credit losses recorded in the prior-year quarter.

Capital & Profitability Ratios Deteriorate

Under the Basel III rules, Tier 1 leverage ratio was 10.5%, as of Mar 31, 2018, down from 10.8% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 13.3%, down from 13.6% in the year-ago quarter.

At the end of the Jan-Mar quarter, return on average assets was 1.45%, inching up from 0.88% as of Mar 31, 2017. Also, as of Mar 31, 2017, tangible return on average tangible common equity was 15.5%, up from 8.8% a year ago.

Outlook

Management projects pre-provision net revenue to increase in the high-single digits rate, on the assumption of no further rate hikes.

Considering the effect of $11 million of interest recoveries accounted in first-quarter 2018, management expects net interest income to rise moderately in the next 12 months, driven by continued growth in loans, partially offset by a slight rise in funding costs.  Notably, the projection does not take into assumption further rate hikes.  

Customer related fees is expected to moderately increase in the upcoming four quarters.

Zions expects non-interest expense to increase marginally in 2018.
For 2018, preferred dividends are expected to be approximately $34 million.

Moreover, efficiency ratio (excluding any benefits of rate hikes) is projected to be below 60% for 2019.

Management expects effective tax rate to be in the range of 24–25% in 2018, ignoring stock-based compensation.

For the next four quarters, management projects moderate growth in total loans, on the back of moderate to strong uptick in C&I, municipal, 1-4 family, owner occupied and CRE loan portfolios, as well as stable to slight increase in O&G portfolio.

Management expects the national real estate portfolio to shrink in 2018. Further, this decline is predicted to continue over the next 18 to 24 months.

Management anticipates the yield on securities to increase moderately, over time, since yield on new securities is higher than the yield on the current portfolio.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There have been four revisions higher for the current quarter compared to five lower.

VGM Scores

At this time, ZION has an average Growth Score of C, however its Momentum is doing a lot better with an A. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.

Outlook

Estimates have been trending downward for the stock and the magnitude of these revisions looks promising. Notably, ZION has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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