Why Is Zions (ZION) Down 0.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Zions (ZION). Shares have lost about 0.5% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Zions Q3 Earnings Miss on Higher Provisions, Revenues Rise Y/Y

Zions’ third-quarter 2022 net earnings per share of $1.40 lagged the Zacks Consensus Estimate of $1.58. Also, the bottom line declined 3% from the year-ago quarter. We too had projected earnings to be $1.58 per share.

Results were adversely impacted by higher provisions on worsening macroeconomic outlook. A rise in non-interest expenses, lower deposit balance and deteriorating capital and profitability ratios were the other undermining factors. Yet, improvement in net interest income (NII) driven by rising rates and increasing loan demand was a major positive. Also, higher non-interest income on solid capital markets performance acted as a tailwind.

Net income attributable to common shareholders was $211 million, down 10% year over year.

Revenues & Expenses Rise

Net revenues (tax equivalent) were $838 million, jumping 20% year over year. The top line also surpassed the Zacks Consensus Estimate of $813 million. Our estimate for the metric was $807.3 million.

NII was $663 million, growing 19% in the prior-year quarter. The rise was mainly driven by higher interest rates and a favorable change in the composition of interest-earning assets. Likewise, the net interest margin (NIM) expanded 56 basis points (bps) to 2.87%. Our estimates for NII and NIM were $653.2 million and 2.83%.

Non-interest income was $165 million, increasing 19%. This was mainly attributable to a rise in capital markets and foreign exchange fees and commercial account fees.

Adjusted non-interest expenses were $477 million, up 10%. We had expected this metric to be $483.6 million.

The efficiency ratio (non-GAAP) was 57.6%, down from 59.8% in the prior-year period. A rise in the efficiency ratio indicates a decrease in profitability.

As of Sep 30, 2022, net loans and leases held for investment were $53.4 billion, up 3% from the prior quarter. Total deposits were $76 billion, down 4%.

Credit Quality Worsening

The ratio of non-performing assets to loans and leases, as well as other real estate owned, contracted 36 bps year over year to 0.28%.

In the reported quarter, the company recorded net loan and lease charge-offs of $27 million against net recoveries of $1 million in the prior-year quarter. Also, the provision for credit losses was $71 million against a benefit of $46 million in the year-earlier quarter.

Capital & Profitability Ratios Deteriorate

Tier 1 leverage ratio was 7.5% as of Sep 30, 2022, compared with 7.6% at the end of the prior-year quarter. Tier 1 risk-based capital ratio of 10.3% decreased from 11.6%.

Further, as of Sep 30, 2022, the common equity tier 1 capital ratio of 9.6% declined from 10.9% in the prior-year period.

At the end of the third quarter, the return on average assets was 0.97%, down from 1.08% as of Sep 30, 2021. Also, the return on average tangible common equity was 19.5%, up from 14.2% in the year-ago quarter.

Share Repurchases

The company repurchased 0.9 million shares for $50 million in the reported quarter.

Outlook

Management has provided the outlook for financial performance for the third quarter of 2023 on a year-over-year basis. The quarters in between are subject to normal seasonality.

Loans (excluding PPP loans) are expected to witness moderate growth. This will be driven by moderate growth in home equity, municipal, commercial & industrial (C&I) and owner-occupied loans, and stable to moderate growth in oil & gas, and commercial real estate (CRE) loans. Our estimates for total loans show a 2.4% year-over-year increase. The company anticipates loan growth gradually slowing down on unfavorable impacts of higher interest rates and probable economic slowdown.

Deposit growth is expected to slow down.

Latent and emerging interest rate sensitivity, along with loan growth and manageable changes in deposit volumes and pricing, is expected to increase NII (excluding PPP loan income) approximately 13%. We are projecting NII to grow 8.4%.

Customer-related fees (excluding securities gains and dividends) are expected to increase marginally. We estimate the same to rise 1.2%.

On the cost front, adjusted non-interest expenses are likely to increase at the higher end of the mid-single digit rate on inflationary pressure.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -5.81% due to these changes.

VGM Scores

Currently, Zions has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, 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.

Outlook

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

Performance of an Industry Player

Zions is part of the Zacks Banks – West industry. Over the past month, East West Bancorp (EWBC), a stock from the same industry, has gained 1.6%. The company reported its results for the quarter ended September 2022 more than a month ago.

East West Bancorp reported revenues of $627.36 million in the last reported quarter, representing a year-over-year change of +33.8%. EPS of $2.08 for the same period compares with $1.57 a year ago.

East West Bancorp is expected to post earnings of $2.23 per share for the current quarter, representing a year-over-year change of +46.7%. Over the last 30 days, the Zacks Consensus Estimate has changed -2.2%.

East West Bancorp has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.

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