DBRS Confirms Zions Bancorporation Senior Debt at BBB (low); Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Zions Bancorporation (Zions or the Company) and its related entities, including Zions’ BBB (low) Issuer & Senior Debt rating. The trend on all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings confirmation reflects Zions improving credit profile, solid funding, and sound capital position. Ratings also consider the Company’s pressured core earnings generation capacity, commercial real estate (CRE) exposure concentration, and outsized yet contracting bank and insurance trust preferred CDO portfolio. Overall, DBRS considers Zions to be in the upper range of its rating category. DBRS notes that sustained improvement in the Company’s core earnings generation along with further substantial reductions in its riskier CDO securities portfolio, while maintaining sound capital levels, could result in positive ratings implications. Conversely, a material decrease in core earnings and/or capital, as well as sustained material erosion in asset quality, could result in negative ratings pressure.

Underpinning the Company’s ratings is a solid banking franchise that is located in eleven Western and Southwestern states that, as a region, have historically outpaced the national average in GDP and job creation growth rates. Overall, Zions operates through eight commercial bank subsidiaries, each with their own brand name, CEO, and management team. This operating structure allows the Company to specifically tailor its products and services to customers at the local level.

Asset quality continues to improve, reflecting declining levels of non-performing assets (NPAs) and very low net charge-offs (NCOs). Specifically, NPAs (excluding performing restructured loans) have declined by $203.3 million, or 37.8%, since September 30, 2013, and represented a manageable 0.84% of total loans, leases, and other real estate owned, at September 30, 2014. Meanwhile, net charge-offs represented a very modest 0.11% of average loans for 3Q14. DBRS notes that the Company has a concentration in commercial real estate (CRE) loans, which total approximately 330% of tangible common equity (on a GAAP basis: 191%, excluding owner occupied loans). DBRS notes that, in a general economic downturn, the CRE concentration could exacerbate loss levels. Finally, despite nine consecutive quarters of negative provisions, loan loss reserve coverage remains sound, in DBRS’s view, at 199% of nonperforming loans and 1.5% of total loans.

A challenge for the Company continues to be its pressured core earnings generation, which reflects a moderating net interest margin (NIM), high level of liquid assets, limited level of fee income, and an elevated expense base. Specifically, spread income continues to be pressured by a narrowing net interest margin, offset by moderate loan growth. Positively, future spread income should benefit from lower funding cost, driven by debt maturities and calls. Meanwhile, the Company’s elevated non-interest expense base, in part, reflects Zions’ multi-bank operating platform, as well as costs associated with ongoing systems enhancement, and higher regulatory related costs. DBRS notes that the Company is highly asset sensitive and is well-positioned to benefit from rising interest rates, especially at the short-end of the curve.

Easily funding the Company’s loan portfolio is a good sized core deposit base that includes a large component of non-interest bearing demand deposits, which benefits the NIM. Meanwhile, the Company maintains a solid level of liquidity, which includes a large level of cash and interest bearing demand deposits, as well as a modestly sized securities book. Importantly, Zions has made headway in reducing the size of its riskier CDO portfolio, which totaled $763 million (amortized cost) at September 30, 2014, down from $1.9 billion at March 31, 2013. Positively, the condition of the banks that issued the underlying trust preferred securities continues to improve.

Zions’ capital position is sound and was bolstered by the 3Q14 issuance of $525 million in common equity. The equity raise was precipitated by the Federal Reserve’s objection to its 2014 CCAR submission, and, indeed, the subsequent re-submission was not objected to by the Federal Reserve. With the capital infusion, Zions’ Tier 1 common and Tier 1 risk-based capital ratios fall within the top quartile of its large regional bank peers. Moreover, the Company’s Basel III Tier 1 Common Equity ratio on a fully phased-in basis was approximately 11.6%, readily above the minimum.

Zions Bancorporation, a financial holding company headquartered in Salt Lake City, Utah, reported $55.4 billion in assets at September 30, 2014.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: January 5, 2005
Most Recent Rating Update: December 18, 2013

For additional information on this rating, please refer to the linking document under Related Research.