New Core System And Digital Advances Set To Boost Bank's Efficiency And Customer Growth

Key Takeaways

• Modernization of technology and expansion in digital offerings are set to improve customer experience and attract more business, boosting revenue growth.
  
• Strategic focus on cost control and efficient management of technology and employment expenses expected to maintain or enhance net margins.
  
• Transitioning to new technology and cautious loan growth strategy amidst economic uncertainties could challenge Zions Bancorporation's operational efficiency and revenue.

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 completion of the new core operating system for loans and deposits, resulting in operational efficiencies and better customer service, is expected to reduce costs and training time, potentially improving net margins.
  
• Advances in digital offerings and technology infrastructure modernization are likely to enhance the customer experience and potentially attract more business, positively impacting revenue growth.
  
• A focus on building a granular deposit base and expanding customer relationships through targeted campaigns and small business lending initiatives could bolster stable funding sources and contribute to net interest income growth.
  
• Expansion of capital market capabilities and a push towards delivering these services to clients promise to grow fee income over the next 4 quarters, which may positively affect revenue.
  
• A strong emphasis on controlling adjusted expenses and managing technology and employment costs effectively is anticipated to sustain or improve net margins despite an incremental rise in noninterest expense predicted for the second quarter of 2025.

Assumptions

• Analysts are assuming Zions Bancorporation National Association's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.7% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $822.1 million (and earnings per share of $5.47) by about September 2027, up from $612.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2027 earnings, up from 10.9x today. This future PE is lower than the current PE for the US Banks industry at 11.4x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Risks

• The conversion to a new core operating system, while modernizing the bank's technology, introduces the risk of unanticipated challenges in integrating and optimizing new systems, potentially impacting operational efficiency and cost management.
  
• Though loan demand has increased, the cautious approach to loan growth and the impact of higher rates could limit revenue growth if the market for loans doesn't expand as anticipated.
  
• The identified increase in classified loan balances, particularly in the C&I portfolio, indicates potential future credit quality issues that could lead to higher net charge-offs and provision expenses, affecting earnings.
  
• Reliance on continuous technology improvements and digital product capabilities to compete with major bank competitors introduces the risk of increased technology-related expenses, which could impact net margins if cost controls are not effectively managed.
  
• The bank's performance is also tied to the economic outlook and interest rate environment, with anticipated benefits from the current rate environment being susceptible to rapid changes in economic conditions or policy, potentially affecting net interest income and overall financial stability.

Valuation

• The analysts have a consensus price target of $52.07 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 $58.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $822.1 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 6.4%.
• Given the current share price of $45.03, the analyst's price target of $52.07 is 13.5% 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.