DBRS: Zions 3Q Core Earnings Flat; Classified Energy Loans Up

Summary:
• Zions reported 3Q15 earnings applicable to common shareholders of $84.2 million, as compared to a loss of $1.1 million for 2Q15. The prior quarter’s results reflected $137 million of losses associated with the sale of the remainder of its collateralized debt obligations (CDOs).
• The Company’s 3Q15 adjusted IBPT (income before provisions and taxes excluding non-core items and security gains/losses) was relatively flat quarter-on-quarter (QoQ), as a decrease in revenues was largely offset by a decline in expenses.
• 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) 3Q15 results as showing some positive results on expense initiatives while core revenues were relatively unchanged from the linked quarter.

Despite a decline in the net interest margin (NIM), net interest income was relatively flat QoQ, as growth in average interest earning assets provided some offset. The NIM declined seven basis points on proportionally higher cash and securities balance and reduced accretion from loans purchased from the FDIC. Core noninterest income was also flat for the quarter with increases in service charges on deposit accounts and other service charges offset by a drop in wealth management, loan sales and servicing and capital markets related revenue. Finally, core expenses, although remaining elevated, declined during the quarter. Management is looking to take $120 million out of its expense base and is on track to achieve 50% of that reduction by YE15. As part of this expense initiative, the Company noted it received regulatory approval to consolidate its seven banking charters into one, which is expected to be completed by YE15.

Despite some moderate deterioration in the energy portfolio, overall asset quality remains sound and highly manageable. Indeed, during the quarter, non-performing assets declined modestly even with further deterioration within the energy portfolio. Additionally, net charge-offs, while increased QoQ, remain low. Nonetheless, the energy book is expected to deteriorate further in future quarters given sustained low energy prices. Specifically, 15.7% of the portfolio was classified at September 30, 2015, up from 11.3% at June 30, 2015, but below the 20% peak of classified loans during the last downturn. Overall, Zions’ energy-related credit exposure is material, representing approximately 7.5% of total loans, but the Company has been prudently building its energy-related reserves.

Other balance sheet fundamentals remain solid, as Zions’ funding profile remains sound and its capital position is improving. Indeed, Zions’ had an estimated Basel III common equity tier 1 capital ratio of 12.17% (2015 phased-in basis) at September 30, 2015 up from 12.00% at June 30, 2015. The Company’s loan portfolio is readily funded by deposits including 44% non-interest bearing demand deposits. Given the structure of its balance sheet, DBRS expects Zions to benefit from higher rates.

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.