DBRS: Zions’ NI Down Due to Energy-Related Provision; Higher Expense Pressures Core Earnings

Summary:
• 4Q14 earnings applicable to common shareholders of $73.2 million, down 7.5%, QoQ, mostly reflecting a swing in provisions for loan losses and unfunded lending commitments.
• 4Q14 adjusted income before provisions and taxes (DBRS’ core earnings metric; IBPT) decreased 4.7%, QoQ, pressured by higher adjusted expenses, partially offset by improved adjusted revenues.
• DBRS, Inc. rates Zions Bancorporation Issuer & Senior debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views Zions Bancorporation’s (Zions or the Company) 4Q14 results as pressured by the difficult operating environment. Overall, lower QoQ core earnings reflected higher adjusted expenses, which more than offset improved adjusted revenues. 4Q14 results also reflected higher loan and deposit growth. Asset quality remains sound and the impact of lower oil prices on the Company’s energy exposures has been negligible at this early date. That said, due to the sharp decrease in oil prices, Zions’ decided to increase the qualitative portion of its reserves, which led to sizable swings in provisions for loan losses and unfunded lending commitments, QoQ. Indeed, the Company’s provisions for loan loss reserves were $11.6 million in 4Q14, up from a $54.6 million negative provision in 3Q14.

DBRS notes that Zions’ oil and gas energy related loan balances, which represent 7.9% of total loans, are performing well, with only 0.5% of the outstanding balances non-performing. DBRS will continue to closely monitor the segment.

Improved adjusted revenues on a linked-quarter basis reflected a moderate increase in spread income, along with a more modest increase in adjusted fee income. Specifically, improved spread income was driven by higher levels of average loans and average securities, along with a 5 bps widening of the NIM which reflected lower interest expense due to debt redemptions in 3Q14.

Adjusted expenses remain elevated, with Zions’ adjusted 4Q14 efficiency ratio at 73% (DBRS calculated), signaling room for improvement in both expenses and revenues. Higher adjusted expenses, QoQ, were mostly due to a $17.8 million swing in provisions for unfunded lending commitments, and higher professional services expense related to CCAR submission, and new lending, deposits and reporting systems.

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, while its subsequent re-submission was not objected to by the Federal Reserve.

DBRS rates Zions Bancorporation’s Issuer & Senior debt at BBB (low) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.