DBRS Confirms Zions Bancorporation Senior Debt at BBB (low); Revises Trend to Positive

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. Additionally, the trend on all ratings has been revised to Positive from Stable. DBRS has also discontinued and withdrawn the ratings of Zions’ Commerce Bank of Oregon subsidiary, which was merged into Zions’ Commerce Bank of Washington subsidiary earlier this year. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The ratings reflect the Company’s commercially-focused banking franchise, with an attractive geographic footprint covering many high growth markets, a solid core deposit franchise, that readily funds the Company’s loan portfolio, and solid liquidity. The ratings also consider Zions’ dependence on spread income, as well as the Company’s moderately-sized energy exposure.

The Positive trend reflects Zions’ improving credit profile, reduced risk profile, solid funding, and sound capital position. DBRS notes that the Company exited its remaining CDO exposure in 2Q15, eliminating an asset class that had created significant losses, elevated risk-weighted assets and performed poorly in Federal Reserve stress testing. DBRS also recognizes efforts by the Company to reduce its exposure to commercial real estate (CRE), as well as other enhancements made to improve its risk management process. These improvements are tempered by the Company’s still pressured core earnings generation, elevated efficiency ratio and exposure to the energy sector. DBRS notes that the Company has a number of initiatives in place to improve earnings and control expenses. These initiatives include a focus on building fee income and keeping expenses flat. A charter consolidation, which is expected to be completed at YE, will also aid in enhancing operating efficiencies. If the Company is successful in improving its operating efficiency, creating positive operating leverage, without increasing its risk profile and navigates through the energy downturn with manageable credit costs, DBRS would likely raise the Company’s ratings. Conversely, an inability to improve core earnings, or a sustained material erosion in asset quality, including losses in the energy portfolio significantly exceeding current projections, would likely result in the removal of the Positive trend.

A challenge for Zions, as well as much of the industry, continues to be improving earnings generation. Net interest margin (NIM) pressure, a high level of liquid assets, a waning benefit from reserve releases, and an elevated expense base have all contributed to fairly modest returns. Specifically, spread income continues to be pressured by a narrowing NIM, offset by moderate loan growth. Positively, future spread income should benefit from lower funding costs, as well as higher interest rates as Zions is highly asset sensitive. 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.

Asset quality continues to reflect manageable levels of non-performing assets (NPAs) and modest net charge-offs (NCOs). Specifically, NPAs (excluding performing restructured loans) represent 0.92% of loans and other real estate owned at September 30, 2015, up from 0.83% at September 30, 2014. Meanwhile, NCOs were 0.31% of average loans for 3Q15, up from 0.11% in 2Q15 reflecting some deterioration in the Company’s energy book, which accounts for 7% of the total loan portfolio. Positively, DBRS notes that the Company’s CRE concentration has declined. Indeed, CRE, which had totaled approximately 330% of tangible common equity at September 30, 2014, now represent 238% (on a GAAP basis: 117%, excluding owner occupied loans).

Zions’ capital position is sound. However, the Company has struggled with CCAR and DFAST stress testing and needed to raise additional common equity in 2014. DBRS believes the steps the Company has taken to de-risk the balance sheet should improve its results during stress testing, as well as in times of actual stress. 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 transitional basis, was 12.16%, readily above minimum requirements.

Zions Bancorporation, a financial holding company headquartered in Salt Lake City, reported $58.4 billion in assets as of September 30, 2015.

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 (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: January 5, 2005
Most Recent Rating Update: October 23, 2014

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