Zions Bancorp Na (NASDAQ:ZION)

Historically low ROE business, in an area hard hit by Covid-19

Zions Bancorporation (Nasdaq Global Select: ZION)
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Thesis: Over the last two years, ZION's earnings growth rate has been higher than most all of their peers. The spread between long-term and short-term rates expands during interest rate hikes, because long-term rates tend to rise faster than short-term rates. As banks tend to borrow on a short-term basis and lend on a long-term basis, they benefit from the rising difference in rates. Very little of the increasing returns from rising interest rates are usually passed along to customer accounts, especially early in the cycle. The Federal Reserve continues to nurture the banking sector, and measures they take to support the banks that are still struggling also benefit ZION. The US home, commercial, and industrial construction market continues to expand with increasing sales at higher prices which benefits ZION's mortgage and loan businesses. Recovery in crude oil prices benefits the whole economy of TX and OK where ZION has a strong presence. Continued US economic growth benefits the whole banking sector. Today would recommend the stock below $54.
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Zions Bancorporation (ZION) is large regional bank holding company operating in the western and southwestern US. As of Dec 31, 2017, the company operated 433 domestic branches in 11 states under the divisions of Amegy Bank of Texas, California Bank & Trust, National Bank of Arizona, Nevada State Bank, The Commerce Bank of Oregon, The Commerce Bank of Washington, Vectra Bank Colorado, and Zions Bank (Utah). ZION greatly expanded in the 1990s by acquiring dozens of smaller local banks and bank chains. The 2000 recession slowed down their expansion, and then the Great Financial Collapse of 2008 put an end to it.
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Like most banks in 2008-09, ZION was severely affected by bad loans and the shrinking economy. Their stock went from a peak of $88 in 2007 down to $6 in 2009. The stock price at the time of this pitch is $58, which is also where it traded at in the 1998s. ZION has mostly recovered today, with normalized bank metric numbers across the board. Their current total assets are north of $65 billion.
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Today, all of the banks with over $50 billion in assets submit to governmental stress testing and capital management standards, which limit their ability to declare dividends, repurchase common stock, redeem preferred stock and debt, access capital markets, or make acquisitions without prior approval. A banking reform bill soon coming up for a vote in the House of Representatives would raise the threshold to $250 billion in assets.
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ZION is perhaps a little more conservative than their peers, based on the performance and asset quality ratios that the bank presents. They are benefiting from growth in the average balances of loan and investment securities portfolios, and increases in short-term benchmark interest rates. This past quarterly filing reported a 3.56% net interest margin, an Efficiency Ratio of 61.3% (non-GAAP), a reduction of in loan loss reserves due to improving economics in the oil and gas-related portfolio, and an effective tax rate of 22.7% under the new tax law.
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Three-quarters of their revenue comes from net interest income, which in the first quarter of 2018, came in at $542 million (a 10.8% year-over-year quarterly improvement). About 45% of their bank deposits are in non-interest bearing accounts compared to about 30% average of their peers. Net profit margin came in at 31.8% using the previous accounting rules, and 15.1% under the new rules that require that unrealized gains and losses from investment securities be included on the income statement.
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Zions is planning to replace their assorted antiquated computer systems with a fully-integrated, state-of-art system, complete with modern customer interfaces that will replace 3 loan systems, 4 related deposit systems and the teller system. Many other upgrades and additions are in the works for internet digital transactions and other banking services.
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ZION's dividend payout has been recovering from the financial crisis of 2008 when it was reduced to $0.01 quarterly. It has been significantly improving over the last 5 years. Trailing five-year dividend growth rate is 51.8% and the yield today is at $0.24 quarterly (18% payout ratio)
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There was a surge in institutional buying of bank stocks in early 2017 that since has waned, but still remains slightly positive today. The KBW Banking Index underperformed the S&P in 2017, despite rising interest rates. The 10 top-performing banks in this index generated an average total return of 27.4% in 2017 compared to a 13.4% decline for the 10 worst performers. ZION returned about 17% in total return.
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Some historic price comparisons:
12/1997 share price $45.38 earnings $1.91 P/E 23.76 dividend $0.48
12/2006 share price $82.44 earnings $5.46 P/E 15.10 dividend $1.47
12/2017 share price $50.83 earnings $2.71 P/E 18.76 dividend $0.44
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Over a twenty year span, encompassing two recessions, one of them very bad for banks, the compound annual growth rate (CAGR) of the ZION's share price is 0.57%. The CAGR of their earnings is 1.76%. Assume the difference comes from the company being in its high growth phase in the late 1990s, with an accompanying higher P/E.
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Some valuation estimates (adjusted for accounting change):
Schiller 10-yr median P/E 14.15 = $47.26
Benjamin Graham Fair Value = $52.02
Using Peter Lynch's dividend-adjusted P/E/G Fair Value and working backwards to growth rate, the current price assumes a forward annual growth rate of 15.6%.
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Analysts' one-year target prices: For 14 analysts is $60.57 ($54-$67 range), and is about $61.50 just looking at the four highest-ranked analysts.
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CONS: ZION has been sporting a large short position in their shares since mid-2017 that is currently at 13.1% of float (10 days to cover). A large "days to cover" value could indicate that short sellers are using the stock to hedge a long bet elsewhere, or more likely it could mean that short sellers believe the stock will decline in price.
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Outstanding common shares:
Feb 13, 2017 202,422,704 shares
Feb 9, 2018 196,514,295 shares
April 30, 2018 197,114,982 shares
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Price: $51.90 | Annualized Dividend: $0.96 | Dividend Yield: 1.85%