A month has gone by since the last earnings report for Zions (ZION). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Zions due for a breakout? 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 catalysts.
Zions Q2 Earnings Miss Estimates, Expenses Increase
Zions’ second-quarter 2019 earnings per share of 99 cents missed the Zacks Consensus Estimate of $1.09. Nevertheless, the figure compared favorably with the prior-year quarter’s earnings of 89 cents.
Results were adversely affected by an increase in expenses and lower non-interest income. Moreover, the company recorded higher provision for credit losses during the quarter, which was a negative factor. However, rise in net interest income was a tailwind. Also, the balance sheet position remained strong.
Net income attributable to common shareholders was $189 million, up 1.1% year over year.
Revenues Improve, Costs Rise
Net revenues for the quarter under review were $701 million, up 2.2% year over year. However, the top line lagged the Zacks Consensus Estimate of $723.2 million.
Net interest income was $569 million, up 3.8% from the prior-year quarter. This rise was primarily attributable to loan growth, and increase in interest and fees on loans, partially offset by higher interest expenses. However, net interest margin contracted 2 basis points (bps) year over year to 3.54%.
Non-interest income amounted to $132 million, down 4.3% from the year-ago quarter. This downside was primarily due to a fall in dividends and other investment income. Moreover, the company recorded net securities losses in the quarter against net securities gains reported in the year-ago quarter.
Adjusted non-interest expenses were $423 million, up nearly 1% from the prior-year quarter.
Efficiency ratio was 59%, down from 60.9% reported a year ago. A fall in efficiency ratio indicates improvement in profitability.
Strong Balance Sheet
As of Jun 30, 2019, net loans held for investment were $48.1 billion, up from $47.1 billion recorded at the end of the prior quarter. Total deposits were $54.3 billion, down marginally from $54.5 billion recorded at the end of the first quarter.
Credit Quality: A Mixed Bag
The ratio of non-performing assets to loans and leases as well as other real estate owned shrunk 25 bps year over year to 0.52%.
However, net loan and lease charge-offs were $14 million at the end of the reported quarter against recoveries of $12 million in the prior-year quarter. Further, provision for credit losses was $21 million, up 75% from the year-earlier quarter.
Capital Ratios Deteriorate, Profitability Ratios Mixed
Tier 1 leverage ratio was 9.5% as of Jun 30, 2019, compared with 10.5% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 11.8%, down from 13.3% in the year-ago quarter.
At the end of the second quarter, return on average assets was 1.14%, down from 1.19% as of Jun 30, 2018. However, as of Jun 30, 2019, return on average tangible common equity was 12.7%, up from 12.4% witnessed a year earlier.
During the quarter, Zions repurchased $275 million worth of shares.
Net interest income is expected to remain stable or 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 increase slightly.
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 in 2019 are expected to increase at a low-single-digit rate on a year-over-year basis.
The company expects to achieve an efficiency ratio of below 60% for 2019.
Effective tax rate is anticipated to be approximately 23% for 2019.
Increase in loan loss provisions is projected to be modest in the next 12 months.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
Currently, Zions has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Zions has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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