Zions Bancorporation, National Association

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Zions Bancorporation, National Association is a U.S. regional bank providing a wide range of banking and related financial services primarily in Western and Southwestern states.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Zions Bancorporation faces a challenging macro environment with interest rate volatility and pressure on funding costs. While it has a strong regional presence and a diversified lending portfolio, the level of competition and the impact of regulatory changes create uncertainty.

Business Overview

Zions Bancorporation, National Association, known as ZION, operates as a bank holding company with a network of banking affiliates. Its principal business lines include:

  • Commercial and Industrial Lending: Offers loans to small and mid-size businesses. This segment is significantly affected by economic cycles, which can lead to periods of strong growth and periods of increased defaults.
  • Commercial Real Estate Lending: Provides loans secured by real estate. Exposure to downturns in the real estate market creates risk.
  • Retail Banking: Serves individual customers, offering mortgages, credit cards, and deposit accounts. This segment is impacted by consumer behavior, affordability, and economic conditions.
  • Wealth Management: Caters to high net worth individuals offering trust, investment, and brokerage services. This area often has the most stable income stream for banks, but competition is quite high and some firms also face the risk of poor performance.

ZION’s strength lies in its regional focus, allowing a deeper understanding of local economies and customers. It benefits from a large and diversified geographic footprint, which includes operations in 11 Western and Southwestern states, with affiliate banks often having their own local brand and management team.

Moat Analysis: 2/5

Zions’ moat comes primarily from its established regional presence, client relationships, and some operational efficiencies, but these are not enough for a wide moat.

  • Regional Presence (Narrow Moat): Zions has a significant presence in its core markets, especially in Utah where it is the largest full-service commercial bank, giving it strong market share in those areas. However, geographic advantage can be easily replicated by new entrants.
  • Client Relationships: Zions cultivates deep long-term client relationships, especially within the commercial lending division. They often have a better understanding of the local economics and industries.
  • Cost Efficiencies: The company attempts to use their technology and data analysis to produce better and faster services and create some operating efficiencies.

Reasons for a low rating:

  • Low Differentiation: Banking products and services are essentially commodities, making it difficult to create strong differentiation. Customer switching costs are usually low in this area, and consumers are usually price sensitive.
  • High Competition: Banking is a very competitive industry, with many banks offering similar services and fighting for business. The rise of fintech companies adds more complexity to the competitive landscape.
  • Regulatory Risk: Zions is heavily subject to regulations in multiple layers, which create uncertainty about its operations.
  • Economic Sensitivity: As a bank, Zions is highly exposed to macroeconomic factors, such as interest rate changes, inflation, and economic cycles.

Risks to the Moat and Business Resilience

  • Interest Rate Risk: Zions’s net interest income is sensitive to interest rate changes. While higher rates may increase the yield on earning assets, it can also increase the cost of borrowing and deposits.
  • Credit Risk: As a major lender, Zions is exposed to credit risks arising from defaults on loans, particularly from commercial real estate and consumer debt. This risk was heavily influenced by the economic conditions of the COVID-19 pandemic, and may be influenced by any economic slow down or crisis.
  • Regulatory Risk: Changes in banking regulations (such as those proposed for small banks from Basel III implementation) can force Zions to raise or restructure its capital base.
  • Cybersecurity and Technology Risk: There’s a constant threat of cybersecurity breaches and fraud that can jeopardize Zions operations and customer assets. Additionally, failure to keep up with new technologies can make the bank less competitive.
  • Liquidity Risk: Zions must be able to manage its short-term obligations and funding sources effectively. If deposit outflows increase sharply or market access is limited, the company may have problems keeping their business running.
  • Competition from Fintech: New technology companies in the financial sector can quickly bring new, innovative options to customers and erode Zions’ market share.

Financials

Income Statement

The last several quarters show mixed results with increased volatility. Revenue fluctuates due to changes in interest income and fee income. Expenses have also increased and are now almost inline with their historical levels. Net Income has also fluctuated quite a bit as of late.

  • Net Interest Income (NII): Zions is dependent on NII, which is the difference between the interest earned on loans and the interest paid on deposits. NII is highly correlated with the macroeconomic situation, the fed rate, and the demand for loans.
    • ZION’s NII was at $11.5 billion in FY2022 and has been very volatile, rising during the interest hike cycle but may start falling again when they lower interest rates. For the nine months ended Sept 30, 2023 NII was at $8.694 billion, compared to $5.983 in the same period last year.
  • Noninterest Income: Includes fees from various banking services, such as service charges, card fees, and wealth management.
  • ZIONs non interest income decreased by 3%, relative to the prior year. A large portion of noninterest income is from the securities portfolio, so it’s very volatile.
  • Operating Expenses: Include salaries, occupancy, technology, and other operating costs. ZIONS operating expenses have been high in the past but have come down since 2021.
  • Provisions for Credit Losses: Provisions reflect Zions’ expected losses on its loans, which can increase or decrease dramatically when they predict more or less defaults. This is a direct result of credit quality changes.

Balance Sheet

Zions’ balance sheet is highly reliant on loans and deposits. There is no risk of running out of capital.

  • Loans: Loans primarily consist of commercial, industrial, real estate, and consumer loans. The largest category is commercial and industrial loans, and Zions had $53.2 billion total loans outstanding as of December 2022, with $44.7 billion in commercial loans.
  • Securities: A large chunk of Zions assets are represented by marketable securities such as U.S. Treasury bonds. Investment securities had a fair value of $19.7 billion at year end 2022.
  • Deposits: Zions’ deposits are fairly evenly split among commercial and retail accounts. These are the primary funding source for loans and had a value of $71.4 billion as of December 2022.
  • Shareholders’ Equity: It represents ownership capital, it has increased drastically in the past years due to high profitability. It was $11.3 billion at the end of 2022.

Other Considerations

  • Capital ratios Zions exceeded all minimum capital requirements in 2022, with a common equity tier 1 ratio of 9.4%. This implies that they are not at risk of having regulatory constraints.
  • Credit quality Zions’ net loan losses in 2022 were at a decent rate of 0.14% of average loans. The allowance for loan and lease losses (ALLL) was at $576 million.
    • The company has been building up provisions in the last few quarters, with the current allowance at $1.101 billion. This means that they have increased their buffers against unexpected downturns in the credit market, and are anticipating lower credit quality in the coming period.

Understandability: 2/5

Understanding a bank’s financials is very difficult due to all of the off-balance sheet, specialized accounting, and high levels of financial and derivative products used.

  • Complexity of Operations: Banks’ balance sheets, income statements, and cash flows can be complex and difficult to understand, even for experts. Understanding how a bank operates in depth is a major undertaking.
  • Many moving pieces A bank’s financials are highly dependent on economic, financial, and regulatory factors. It’s very difficult to predict what effect the changes to these factors will have on performance and valuation.
  • Off-Balance Sheet Items: Banks tend to have off-balance sheet liabilities such as derivatives or pension liabilities. These items are rarely visible and their nature are often complicated.
  • Lack of transparency: A lot of data about banks (especially when they are private or have subsidiaries) are not easily available. This limits proper analysis and comparisons.

Balance Sheet Health: 3/5

Zions currently operates with high capital, a diversified asset portfolio, and has a decent liquidity coverage, although they are vulnerable to market and credit risks.

  • Capital Adequacy: Zions is well capitalized and comfortably meets regulatory requirements.
  • Asset Portfolio Diversification: The bank has a good diversification in its loan portfolio.
  • Liquidity: Zions has decent levels of liquidity for a financial institution.
  • Rising Interest Rates and Volatility Zions and its counterparts face a challenging environment with rising interest rates and increased cost of funding that will likely impact profitability in the coming years.
  • Leverage: Zions has a leverage ratio of 9%, while a high leverage may amplify any issues with asset quality, defaults on loans, or funding mismatches.

Recent Concerns and Problems

  • Net Interest Margin Pressure: Zions has reported declining net interest income and net interest margins over several quarters. This is a combination of rising interest costs, and a slower growth in their earning assets. Banks that have high sensitivity to interest rates have been more effected than peers.
  • Interest rate volatility: The bank continues to be highly vulnerable to interest rate volatility, which affects the yields on their assets. It’s possible that their future revenues and profits may get negatively impacted by future fluctuations.
  • Economic Downturn Concerns: While economic indicators have been somewhat positive in the past few quarters, they are still vulnerable to a downturn. A recession would have a strong negative impact on both their credit quality and earnings potential.
  • Credit Loss Projections: The bank is trying to provide adequate coverage for loan losses, and continues to report increases to their provisions. Although higher provisions negatively affect earnings in the short term, it is beneficial if credit losses turn out higher than predicted, in the coming quarters.

Zions seems to have solid operational footing, but they are facing many macro and regulatory headwinds that may effect their profitability. Management is actively trying to manage these challenges, and to focus on what they can control.

Conclusion

Zions Bancorporation is a well established regional bank that faces many hurdles going forward. The company has potential to maintain profitability, but also faces many headwinds in the short-term and a high degree of uncertainty. As such it’s a risky investment option with an unknown trajectory. ZION may end up being a high-growth opportunity, but it may also get beaten by competitors in the current macro environment, where they may not be able to adapt well.