Zions Bancorporation: Solid Q2 With Minimal Credit Deterioration (Rating Upgrade)

Core Viewpoint - Zions Bancorporation has demonstrated solid performance with a 33% increase in shares over the past year, supported by strong Q2 results and an upgrade to a buy rating due to significant liquidity and strong underwriting results [14][26]. Financial Performance - Net interest income rose by $11 million from Q1 and increased by 1% year-over-year, with a net interest margin (NIM) of 2.98%, the highest level in over a year [3][17]. - Total deposits increased by approximately 1% or $800 million during the quarter, although the cost of deposits rose by 5 basis points [6][19]. - Zions earned $1.28 per share in Q2, beating consensus estimates by $0.18, with adjusted earnings of $1.21, reflecting a 9% increase from the previous year [15]. Loan and Deposit Dynamics - Average loans rose by 0.7%, primarily driven by consumer borrowings, while business and commercial real estate (CRE) loans remained stable [8]. - Noninterest-bearing deposits (NIB) declined by $400 million, but the pace of decline has improved, indicating a potential bottoming out before year-end [7]. Credit Quality and Risk Management - Zions reported a low net charge-off rate of 0.1% in Q2, with a nonperforming asset rate of 0.46%, indicating strong credit quality [23]. - The bank has a well-diversified commercial real estate portfolio with a loan-to-value ratio below 60%, mitigating risks associated with potential defaults [11][23]. Outlook and Growth Expectations - The company expects modest loan growth and a slight increase in net interest income, projecting a 6.3% rise over the next year [21]. - Zions is well-capitalized with a common equity tier 1 (CET1) capital ratio of 10.6%, positioning it favorably against regulatory scrutiny as it approaches the $100 billion asset threshold [24]. Strategic Positioning - Zions is viewed as a potential candidate for bank consolidation in the next 3-5 years, with expectations of becoming a tuck-in acquirer rather than being acquired [24]. - The bank's decentralized business model allows for strong underwriting results and minimal credit losses, despite some higher expenses [15][23].