Coachella Valley Branch Acquisition And AI Advances Will Create Opportunities

Key Takeaways

• Expansion into Coachella Valley is poised to enhance revenue and market presence with significant deposits and loans boost.
  
• Strategic cost optimization and tax changes are expected to enhance net margins and support stable earnings growth.
  
• Economic uncertainties and increased risks in credit quality and deposit stability may hinder loan growth, noninterest income, and net interest margins.

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.

• The acquisition of four branches in Coachella Valley, California, is expected to provide Zions Bancorporation with approximately $630 million in deposits and $420 million in loans, potentially boosting revenue through market expansion and increased financial product offerings in an attractive region.
  
• Zions Bancorporation anticipates improved margins from decreased deposit costs. As the interest-bearing deposit rate decreased, there is an expectation for further optimizations in borrowing costs, which should positively impact the net interest margin.
  
• The recalculated tax impact due to beneficial Utah tax law changes will lead to reduced taxes on investment income in the future, therefore likely increasing net margins and earnings over time.
  
• Investments in AI enhancements and maintaining close relationships with customers should boost customer satisfaction and loyalty while enabling better risk management during uncertain periods, potentially improving revenue stability and future growth.
  
• The management's ability to maintain low net loan charge-offs and stable asset quality, combined with their strategy of managing nonperforming assets, suggests maintaining strong credit quality, which supports earnings stability despite economic uncertainties.

Zions Bancorporation National Association Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zions Bancorporation National Association's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.3% today to 23.5% in 3 years time.
• Analysts expect earnings to reach $830.9 million (and earnings per share of $5.84) by about April 2028, up from $755.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $935.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Zions Bancorporation National Association Future Earnings Per Share Growth

Risks

• The uncertainties surrounding trade policy and tariffs, particularly with manufacturing links to China and Vietnam, may negatively impact the economic outlook, potentially affecting loan growth and net interest income.
  
• The decrease in capital markets fees compared to a record prior quarter indicates potential volatility in customer-related income, risking a decline in noninterest income.
  
• Slower loan growth, driven by cautious client sentiment amidst economic uncertainty, could impact earnings and hinder net interest income growth.
  
• Increases in classified assets, particularly within the commercial real estate (CRE) portfolio, pose risks to credit quality, which could lead to increased provision for credit losses and adversely affect net margins.
  
• The decline in average deposits by 1.9% due to seasonal outflows could reflect deposit instability, affecting funding costs and net interest margins.

Valuation

• The analysts have a consensus price target of $55.105 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 $65.0, and the most bearish reporting a price target of just $47.0.
  
• 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 $830.9 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $43.13, the analyst price target of $55.11 is 21.7% higher.
  
• 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.