Zions Bancorporation's NII Miss Drives Stock Slide Amid Yield Pressures

The recent earnings report from Zions Bancorporation (NASDAQ: ZION) has sent its shares tumbling as investors digested a net interest income (NII) shortfall that missed consensus estimates while revealing underlying challenges in its core profitability. The bank’s Q1 2025 results underscore a mixed narrative: year-over-year growth persists, but sequential weakness and macroeconomic headwinds have sparked concerns about its ability to sustain momentum in a shifting interest rate environment.

The NII Discrepancy
Zions reported Q1 NII of $586 million, a 1.84% decline from Q4 2024’s $597 million, marking the sequential “slip” referenced in the market reaction. This fell sharply short of analysts’ average estimate of $637.31 million, a miss of 8.06% that likely fueled the stock’s post-earnings drop. While year-over-year growth remains robust—up 6.93% from $548 million in Q1 2024—the sequential decline raises questions about near-term execution.

The NII shortfall stemmed from a $34 million drop in interest income, driven by weaker loan yields and softer money market returns. Loan income fell by $23 million, reflecting competitive pricing pressures and slower demand growth, while securities and money market income declined by $11 million. These declines were partially offset by a $31 million reduction in interest expense, primarily due to lower deposit costs (a $45 million decline) and higher borrowing costs (a $14 million increase).

Margin Dynamics and Strategic Shifts
The bank’s net interest margin (NIM) expanded by 5 basis points sequentially to 3.10%, a modest improvement from Q4 2024’s 3.05%, but a 16 basis-point rise year-over-year. This expansion was largely fueled by deposit cost management, as the average cost of deposits dropped by 17 basis points quarter-over-quarter. However, loan yields declined by 8 basis points, highlighting a critical tension: while Zions is successfully reducing funding costs, it faces headwinds in maintaining asset yields amid a slowing economy and competitive lending markets.

The California branch acquisition, finalized in late 2024, added $30 million in average loans and $78 million in deposits, though these figures were partially excluded due to timing. This strategic move positions Zions to capture growth in a key market, but its full impact on NII may not materialize until later in 2025.

The Tax Cloud and Earnings Volatility
While NII was the headline issue, noninterest factors also weighed on results. A $16 million tax charge related to Utah state tax law changes reduced earnings per share by $0.11, amplifying the disappointment. This one-time item underscores the unpredictability of non-NII headwinds, which could complicate earnings forecasts in future quarters.

Investment Implications: A Mixed Picture
Zions’ results reflect a broader challenge for regional banks: balancing cost discipline with the need to sustain asset yields in a competitive environment. The sequential NII decline suggests that Zions’ margin expansion may be peaking, at least in the near term, as deposit cost reductions become harder to achieve. However, the 16 basis-point year-over-year NIM improvement and 14% decline in interest expense highlight effective balance sheet management.

Longer-term, the California expansion and a 14% decline in noninterest income (a Q1 trend across banks due to lower trading activity) suggest Zions is prioritizing core lending growth over volatile revenue streams. If loan demand stabilizes and deposit costs continue to ease, the bank could rebound.

Conclusion: A Hold with Upside Potential
Zions Bancorporation’s stock decline is justified given the NII miss and sequential weakness, but the broader story remains nuanced. Year-over-year growth of 6.93% in NII and a 3.10% NIM—both above historical averages—signal a resilient core business. The California acquisition and deposit cost management suggest strategic advantages that could pay off as the bank navigates 2025.

Investors should monitor Q2 results for signs of stabilization in loan yields and NII. If Zions can reverse the sequential decline and leverage its cost discipline, its 9.2x forward P/E ratio (versus the KBW Index’s 11.5x) could attract buyers. However, persistent loan yield pressures or further margin compression could prolong the stock’s slump. For now, Zions remains a hold, with upside potential if macroeconomic conditions improve and its strategic moves bear fruit.