Given the current market recovery factor and valued growth indicators, we are upgrading our recommendation on the shares of Zions Bancorp. (ZION) to Neutral from Underperform. Although the current economic turmoil has weakened both the revenue growth and the operating leverage of Zions, we believe that once the economy stabilizes, it will have a substantial positive effect on the earning power of the company.

Zions’ fourth-quarter loss of $1.26 per share came in substantially lower than the Zacks Consensus Estimate of a loss of $1.66 per share primarily due to improvement in demand deposits, lower loan loss provisions and strong pricing on new loans. However, these were partially offset by a marginal increase in non-performing assets, credit-related impairment losses on Collateral Debt Obligation (CDO) securities and continued weakness in loan demand.

Despite the sluggishness and fragility experienced in the economic recovery, post the global crisis in the last couple of years, Zions has witnessed improvement with respect to its loan loss provisions and net loan charge-offs that posed a declining trend since the last couple of quarters. Alongside, debt modifications and the favorable trends are also helping the ascent of non-interest demand deposits, thereby putting less pressure on the balance sheet and increasing the return on equity. If this steadfastness continues, the company’s strategic growth initiatives will soon be reflected in its operating results.

Moreover, Zions has achieved solid organic loan growth, consistent with the economic activity across its diverse footprint. This gets further enhanced by acquisitions that fit in well with Zions’ strategic plans. Further, Zions seems much more focused now than it has been for a number of years. After restructuring the operations of Vectra Bank, closing its supermarket branches in Utah and disposing off its e-commerce subsidiary, Zions is now consolidating the system of its various community banks.

However, given the high competitive pressure in the banking industry, we expect continuous deposit pricing pressure as well as growth in higher cost funding accounts to weigh on Zions’ net interest margins (NIM), creating headwinds on the revenue front.

Besides, though loan growth has remained solid, slowing growth in core deposits could cause a negative mix shift, another setback for the NIM. Management expects deposit growth to continue to deter loan growth, a portion of which may be funded from alternative higher cost funding sources.

Overall, while the near-term outlook remains cautious on deteriorating credit quality primarily in the construction portfolio, we believe that Zions’ successful enhancement of capital ratios and improving expense management will drive growth and enhance its competitive leverage once the market rebounds to its historical highs.

On Friday, the shares of Zions closed at $18.44, up 4.1%, on New York Stock Exchange.

Zacks Investment Research

1. (ZION) Zions Bancorporation’s Loss Slims as They Beat Earnings EstimatesOn Monday, Zions Bancorporation (ZION) reported a fourth quarter 2009 net loss of $176.5 million...
2. (ZION) Zions Bancorporation Replaces Cash with Stock for Top ExecutivesFocusing on damage control after the financial crisis, on Dec. 28, Zions Bancorporation (ZION) announced...
3. (ZION) Zions Bancorporation Finishes Exchange OfferIn an attempt to enhance its financing position in the capital market, Zions Bancorporation (ZION)...
4. (ZION) Zions Bancorporation – Bear of the DayGiven the high competitive pressures in the banking industry, we expect continuous deposit pricing pressures...
5. (ZION) Zions Bancorp- Bear of the DayWhile Zions Bancorp (ZION) net interest margin and deposit growth remain satisfactory, credit quality continues...
6. (ZION) Zions Completes New Common Stock OfferingOn August 27, Zions Bancorp (ZION) successfully completed a $250 million offering of new common...

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