Anticipated Improvements In Net Interest Margin And Credit Quality Will Support Future Profitability

Key Takeaways

• Strategic focus on loan growth and stable deposits is expected to drive revenue increase and sustained growth.
  
• Zions aims to improve profitability by enhancing net interest margins and managing expenses efficiently amidst inflation.
  
• Increased credit risk and regulatory pressures, coupled with unpredictable funding costs and natural disaster liabilities, could strain margins and earnings growth.

Catalysts

Provides various banking products and related services primarily in the states of Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming.

• Zions Bancorporation anticipates continued improvement in net interest margin driven by the downward repricing of interest-bearing liabilities and reduced average short-term borrowings, which should positively impact net interest income and profitability.
  
• The company expects customer-related noninterest income to moderately increase in 2025, supported by strong results from their Capital Markets business, contributing to overall revenue growth.
  
• Zions plans to carefully manage expenses despite inflationary pressures, with a focus on maintaining an efficient expense structure, which should aid in improving net margins and profitability.
  
• The bank's strategic focus on loan growth, particularly in commercial and small business sectors, alongside stability in deposit levels, is likely to support increased revenue and sustained growth in 2025.
  
• Anticipated improvements in credit quality and manageable potential losses in the commercial real estate portfolio should help maintain stable earnings by minimizing provision for credit losses.

Zions Bancorporation National Association Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zions Bancorporation National Association's revenue will grow by 4.5% annually over the next 3 years.
• Analysts are assuming Zions Bancorporation National Association's profit margins will remain the same at 24.1% over the next 3 years.
• Analysts expect earnings to reach $841.6 million (and earnings per share of $5.78) by about January 2028, up from $737.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $721 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.28%, as per the Simply Wall St company report.

Zions Bancorporation National Association Future Earnings Per Share Growth

Risks

• The potential for reduced loan growth in the mortgage and commercial real estate sectors could negatively affect revenue.
  
• Increases in classified loans, particularly within commercial real estate (multifamily, industrial, and office), suggest heightened credit risk that could impact net margins and earnings due to potential loan losses.
  
• The banking industry’s regulatory environment, including the possibility of incorporating AOCI in capital calculations, could influence capital adequacy and limit strategic financial flexibility, potentially affecting earnings per share.
  
• The risks associated with the impacts of natural disasters, such as the California wildfires mentioned, could impose unforeseen financial liabilities and could affect net margins if insurance coverage and mitigation programs do not adequately offset damage-related costs.
  
• Volatility in deposit betas and interest rates could create unpredictable funding costs that might strain net interest margin, reducing potential earnings growth.

Valuation

• The analysts have a consensus price target of $62.72 for Zions Bancorporation National Association based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $71.0, and the most bearish reporting a price target of just $52.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $841.6 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 6.3%.
• Given the current share price of $57.77, the analyst's price target of $62.72 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.