Last week, Silvergate (SI, Financial) and then SVB Financial Group's (SIVB, Financial) Silicon Valley Bank collapsed. As a result, many bank stocks have not had a good start to the week. Many of them are deserving of the additional scrutiny.
Zions Bancorp NA (ZION, Financial), however, is not one of them. With the stock down 52% over the last 52 weeks, Monday's sell-off appears to be a good starting point for long-term bank investors.
About Zions Bancorp
Headquartered in Salt Lake City, Utah, Zions has historical and cultural ties to The Church of Jesus Christ of Latter-day Saints. The bank was founded in 1873 by Brigham Young and other prominent members of the LDS Church, and has maintained close ties with the church throughout its history. That alone insulates the bank from a run on it.
With a long-standing relationship, the bank has provided financial services to the church and its members for many years and has also supported a variety of church-related projects and initiatives. For example, Zions Bancorp has provided financing for the construction of church buildings, temples and other facilities, and has also supported church-sponsored humanitarian and charitable efforts. Again, there will not be a run on this bank.
Zions has a strong presence in the Western United States, with over 400 branches and 5,000 employees in 11 states. The company's largest market is Utah, where it is the largest bank by deposits and has over 100 branches. In recent years, the company has introduced a number of digital tools and services, including online and mobile banking, electronic bill payment and mobile check deposit. Zions Bancorporation has also invested in artificial intelligence and machine learning technologies to improve fraud detection and risk management.
Excellent financial standing
In January, the company reported very good numbers, beating on both the top and bottom lines. Revenue for the quarter of $873 million was up 17.5% year over year and earnings per share of $1.88 beat analysts' estimates by 22 cents. The company reported very little (0.26%) nonperforming assets and loans 90 days past due and a loan to deposit ratio of 78%. It also declared a dividend of 41 cents per share and a $50 million stock buyback program.
The stock was likely down on Monday because of the bank's exposure to the same assets that many point to as the downfall of Silicon Valley Bank - mortgage-backed securities. At Zions, they make up 74% of its investment portfolio. However, the bank also has roughly $9 billion in other investments and is highly unlikely to experience the kind of business and personal transfers that SVB did. However, these two banks are very different and serve very different customer bases. If the LDS Church’s investment holdings, which total more than $100 billion, are any indication, Zions Bank is lending to non-speculative, highly solvent entities.
Zions is a well run regional bank with a long history of consistent growth. In the last decade alone, the company has continued to squeeze out more profit from annual revenue. In 2013, it generated $263 million in net income on $2.1 billion in revenue. In the last 12 months, its produced $907 million net on just over $3 billion in revenue. Currently, that means investors are able to purchase shares at 6 times earnings and receive 4% a year in dividends. Be greedy when others are fearful.
Risk-reward with Zions
The stock has already rebounded significantly from Monday morning; however, there is still plenty of room left to run. The average banking sector price-earnings multiple is 10. With Zions trading at 6 times earnings and still beating analyst estimates, I do not imagine the market cap will stay in the $6 billion range for the whole year. If the drama surrounding Silicon Valley Bank, First Republic (FRC, Financial), Signature (SBNY, Financial), Silvergate and others does become a systematic issue, Zions will still be standing at the end of it. If that happens, there is always the strategy of dollar-cost averaging on the down side.
Right now, the stock is a bargain and I would anticipate a return to the normalized range of $55 to $70 per share. In the meantime, the company’s dividend is a nice bonus for holding. More importantly, the company is expected to earn over $6.50 a share annually by 2025, which makes this price point even more attractive from a long-term value perspective. Personally, I think there is a solid economic moat due to the bank's customer base and even if earnings only grow at 3% to 4% going forward, the price point the stock trades at currently could make it worthwhile.
With the banking system coming under heightened pressure to guarantee liquidity, the speculation over the weekend was the Federal Reserve needed step in and provide some sort of solution, which it did. Whether right or wrong, only time will tell what that will do short term to the stocks across the sector. However, the risk-reward is tilted heavily in the favor of reward when it comes to Zions Bancorp.
