Why Is Zions Bancorporation (ZION) Up 1.5% Since Its Last Earnings Report?

A month has gone by since the last earnings report for Zions Bancorporation (NASDAQ:ZION) . Shares have added about 1.5% in the past month, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is ZION due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Zions' Q4 Earnings Beat Estimates, Costs Escalate

Zions reported fourth-quarter 2017 adjusted earnings of 80 cents per share, surpassing the Zacks Consensus Estimate of 73 cents. Also, the figure compares favorably with the prior-year quarter’s earnings of 60 cents per share.

Results to a great extent benefited from improvement in both net interest income and non-interest income. Also, the quarter witnessed overall improvement in credit quality. Further, loan growth remained strong. However, higher adjusted non-interest expenses remained a major headwind.

After taking into consideration the tax adjustment, relating to the passage of the Tax Act, net income attributable to common shareholders for the quarter came in at $114 million or 54 cents per share.

For 2017, net income attributable to common shareholders was $550 million or $2.60 per share, up from $411 million or $1.99 per share registered in 2016.

Revenues Improve, Costs Escalate

Net revenues were $665 million for the quarter, increasing 9.4% year over year. However, the figure lagged the Zacks Consensus Estimate of $670.6 million.

Net interest income for the quarter came in at $526 million, increasing 9.6% year over year. The rise was primarily attributable to increased interest income, partially offset by higher interest expenses. Further, net interest margin improved 8 basis points (bps) year over year to 3.45%.

Non-interest income amounted to $139 million, up 8.6% from the year-ago quarter. The rise was due to an increase in all components except other income.

Adjusted non-interest expenses increased 5.1% from the year-ago quarter to $415 million.

The efficiency ratio was 61.6%, down from 64.5% a year ago. A fall in efficiency ratio indicates improvement in profitability.

Strong Balance Sheet

As of Dec 31, 2017, total loans, net of allowance came in at $44.3 billion, up 1.5% from the end of the prior quarter. Total deposits increased nearly 1% from the prior quarter-end to $52.6 billion.

Credit Quality Improves

The ratio of nonperforming assets to loans and leases as well as other real estate owned decreased 41 bps year over year to 0.93%. Further, net charge-offs were $12 million, down 55.6% from the year-ago quarter.

In the reported quarter, the company registered a provision benefit of $12 million, compared with almost nil provisions recorded in the prior-year quarter.

Capital & Profitability Ratios Deteriorate

Under the Basel III rules, Tier 1 leverage ratio was 10.5%, as of Dec 31, 2017, down from 11.1% at the end of the prior-year quarter. Tier-1 risk-based capital ratio was 13.2%, down from 13.5% in the year-ago quarter.

At the end of the reported quarter, return on average assets was 0.74%, decreasing from 0.88% as of Dec 31, 2016. Also, as of Dec 31, 2017, tangible return on average tangible common equity was 7.4%, down from 8.4% a year ago.

Outlook

Management projects pre-provision net revenue to increase in the high-single digits rate.

Management expects net interest income to rise moderately in 2018, driven by continued growth in loans and securities while a slight rise in funding costs is expected to marginally hurt. Notably, the projection does not take into assumption further rate hikes.

The company expects NIM for the first quarter of 2018 to remain stable, sequentially. This is because benefits from the December rate-hike will be offset by the effect of tax reform and its impact on the municipal loan and securities portfolio yield.

Zions expects adjusted non-interest expense to increase in the low-single digits rate in 2018.

Management expects effective tax rate to be in the range of 24–25% in 2018.

Over the next four quarters, preferred dividends are expected to be approximately $34 million.

2018-2019 Objectives

Management projects annual mid-single digit loan growth, driven by improvement in the commercial real estate loan portfolio, which is also expected to grow in the mid-single digits rate.

The company targets customer-related fees to grow slightly from the fourth-quarter 2017 level.

Given that the company has been reinvesting its cash flow from the investment portfolio into higher yielding securities, the securities portfolio is expected to increase in the long term.

Moreover, adjusted efficiency ratio is projected to be below 60% for 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. There have been five revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, ZION has a nice Growth Score of B, however its momentum is doing a bit better with an A. However, the stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for growth and to a lesser degree value.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Interestingly, ZION has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.