DBRS Upgrades Zions Bancorporation to BBB; Stable Trend

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

The upgrade reflects Zions’ improving earnings, reduced risk profile, solid funding, and sound capital position. DBRS also recognizes the Company’s successful efforts to reduce its commercial real estate (CRE) exposure, as well as other enhancements made to manage and improve its risk management process. Additionally, the Company is executing on a number of initiatives to improve earnings and control expenses. DBRS notes that these initiatives are beginning to show some traction with the Company reporting positive operating leverage in recent periods and improving profitability measures. Given its focus on commercial banking and large levels of non-interest bearing deposits, the Company is well-positioned to benefit from rising interest rates.

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

While improved, 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 relatively modest returns. Positively, future spread income should benefit from loan growth, as well as higher interest rates as Zions is highly asset sensitive. Meanwhile, the Company has been committed to keeping expenses relatively flat, and has targeted an efficiency ratio of less than 66% this year and in the low 60% range for 2017, both of which DBRS views as achievable. The efficiency ratio had been above 70% as recently as 2Q15.

Asset quality trends indicate manageable levels of non-performing assets (NPAs) and modest net charge-offs (NCOs), reflecting continued stabilization in oil and gas-related loans and strong performance in the rest of the portfolio. While Zions’ exposure to oil and gas lending is greater than many regional bank peers ($2.3 billion, or 5% of total loans), the Company has built its allocated reserve to approximately 8% of outstanding balances and 21% of criticized loans. DBRS continues to view the Company’s oil and gas exposure, which is performing within management’s expectations, as manageable. Additionally, DBRS notes that the Company’s CRE concentration has declined, especially in the potentially most volatile construction and land development loan category, although this still remains a key lending category for Zions. However, CRE internal exposure limits have been implemented, which should contribute to a better diversified, and lower risk, loan portfolio.

Zions’ capital position is solid, especially considering the steps the Company has taken to de-risk the balance sheet has improved results during stress testing, as well as in times of actual stress. Positively, 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. Nonetheless, DBRS expects Zions to manage down capital over time through capital management activity, including reducing outstanding preferred shares, and organic growth.

Zions Bancorporation, a financial holding company headquartered in Salt Lake City, reported $61.0 billion in assets as of September 30, 2016.

RATING DRIVERS
Further positive rating actions are possible if the Company continues to strengthen its financial performance, including the sustained generation of positive operating leverage and a decreased reliance on net interest income, while maintaining sound asset quality and balance sheet fundamentals. Conversely, a reversion to weaker profitability metrics, or an increase in credit losses that exceed normalized levels; especially should they result from an increase in Zions’ risk appetite, could have negative rating implications.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: John Mackerey
Rating Committee Chair: Michael Driscoll
Initial Rating Date: 5 January 2005
Most Recent Rating Update: 23 December 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.