Given the high competitive pressures in the banking industry, we expect continuous deposit pricing pressures as well as growth in higher cost funding accounts to weigh on Zions Bancorporation’s (ZION) net interest margins (NIM), creating headwinds on the revenue front.
Loan growth has remained solid, but slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to lag loan growth and that a portion of future loan growth may be funded from alternative higher cost funding sources.
The growth through acquisition model exposes the company to the risk of overpaying for targets. We are concerned about Zions commercial real estate (CRE) exposure. CRE represents over one-third of Zions overall loan portfolio. Continued weakness in the residential development and
construction activity in the southwest has resulted in further deterioration of credit metrics in the past several quarters. Given the sluggish economic conditions, we expect credit to further deteriorate across the industry in the coming quarters.
Zions has faced several downgrades by credit rating agencies, primarily reflecting significant net losses, continued deterioration in credit quality and material decline in its tangible common equity capital ratio.
Based on our concerns for further credit deterioration, particularly in the construction portfolio, we are maintaining our Underperform recommendation on the stock.
