Zions Bank Earnings: Earnings Pressure Is Building, but It’s Manageable

Zions Bank Stock at a Glance

• Current Morningstar Fair Value Estimate: $58.00
• Stock Star Rating: 5 Stars
• Uncertainty Rating: High
• Economic Moat Rating: None

Zions Bank Earnings Update

While no-moat-rated Zions’ ZION first-quarter results showed that earnings pressure is building, we view the pressure as being quite manageable.

We had already expected that fourth-quarter results would be the peak for profitability during the current rate cycle, and while the drop off from that peak has accelerated a bit more than we expected, it was not that categorically different. If anything, the bank’s results were a bit better than our updated “shocked” projections, which were published at the end of March.

As we revise our projections again to make sure we are being prudent with our through-the-cycle net interest margin, or NIM, estimates (assuming that rates eventually fall from current levels), we expect to decrease our $58 per share fair value estimate for Zions by a low- to mid-single-digit percentage. Even with that adjustment, we believe the shares remain materially undervalued.

Zions’ deposit base declined by 3% sequentially, as the shift continued into higher interest bearing deposits, and the deposit beta accelerated to 58% from only 15% last quarter. Our “shock” projections had called for a deposit decline of 10%, with an even greater shift into interest bearing balances, although the cycle beta was not far off from our projections.

This movement is putting pressure on net interest income, or NII, which dropped 6% sequentially in the first quarter, is expected to drop another 7% in the second quarter, and then is likely remain relatively stable from there.

While this is bad on the surface, it still puts the bank above the run rates we saw during the first half of 2022. In other words, Zions will still be producing a 10% adjusted return on tangible equity even as it battles the most intense funding pressure event we’ve seen in over a decade. We have a hard time reconciling this with the more than 40% selloff the name has seen over the past year.