Zions Bancorp: A Contrarian Case for Regional Banking Resilience

In the shadow of a sector-wide recalibration, Zions Bancorp (ZION) has emerged as a compelling case study for contrarian value investors. The regional banking sector, long maligned for its exposure to opaque credit risks and regulatory headwinds, now finds itself at a potential inflection point. Zions' third-quarter 2025 results, while not without blemishes, reveal a company navigating a fragile economic landscape with a blend of caution and strategic agility. For investors willing to look beyond short-term volatility, the bank's improving credit fundamentals and alignment with broader sector trends suggest a compelling opportunity.

Credit Fundamentals: A Mixed but Manageable Picture

Zions' Q3 2025 earnings call highlighted a dichotomy of strength and vulnerability. The bank's net interest margin (NIM) expanded by 11 basis points to 3.2%, a robust performance driven by disciplined cost management and a re-steepening yield curve, according to the Q3 2025 earnings call. This improvement outpaced the industry average NIM of 3.25% reported in Q1 2025, according to Deloitte's 2025 banking industry outlook, underscoring Zions' ability to capitalize on structural shifts in interest rates. However, the provision for credit losses-$49 million for the quarter-was a stark reminder of lingering risks.

The bulk of these losses stemmed from a $50 million charge-off tied to two commercial and industrial (C&I) loans at its California Bank & Trust division, according to an Invezz analysis. Management characterized this as an "isolated incident," emphasizing that the bank had already established a full reserve against the remaining $10 million of exposure and initiated legal action to recover approximately $60 million, the earnings call noted. Excluding this anomaly, net charge-offs were a modest 4 basis points of average loans, well below the projected 0.66% industry-wide net charge-off rate for 2025, the Deloitte outlook projected. This suggests that Zions' core credit quality remains resilient, even as it grapples with a single high-profile misstep.

Sector Context: Regional Banks at a Crossroads

The broader regional banking sector is navigating a complex landscape. While the industry's average NIM stabilized at 3.25% in Q1 2025, Deloitte reported, the re-steepening yield curve has created tailwinds for NIM expansion-a critical driver of profitability. Zions' 3.2% NIM, achieved through operational efficiency (its efficiency ratio improved to 59.6%, the earnings call said), positions it favorably within this context.

Yet the sector's credit fundamentals remain a double-edged sword. The projected 0.66% net charge-off rate for 2025, highlighted by Deloitte, -the highest in a decade but still far below crisis-era levels-reflects a normalization of risk after years of historically low defaults. Zions' stable allowance for credit losses (1.2% of loans) and nonperforming assets (0.54% of loans), as reported on the earnings call, indicate a conservative approach to risk management, contrasting with the more aggressive lending practices that have led to recent sector-wide turbulence, such as Western Alliance Bancorp's legal battles covered in the Invezz analysis.

Contrarian Logic: Risk, Reward, and the Path Forward

For contrarian investors, Zions' recent challenges are less a red flag than a test of management's credibility. The bank's swift response to the C&I loan issue-full reserves, legal action, and a third-party review of underwriting policies, the earnings call noted-demonstrates a commitment to transparency. Moreover, its focus on SBA lending and moderate single-digit loan growth, management emphasized on the call, aligns with a strategy of quality over quantity, a critical differentiator in an era of heightened regulatory scrutiny.

The broader sector's volatility, meanwhile, offers a macro-level tailwind. As Goldman Sachs and JPMorgan analysts have noted, regional banks are poised for a multiyear rally driven by loan growth recovery and fee income rebounds, a view summarized in the Deloitte outlook. Zions' deposit growth (7% annualized, per the earnings call) and cost discipline further position it to benefit from these trends.

Conclusion: A Calculated Bet on Resilience

Zions Bancorp is not a risk-free investment. The C&I loan incident and sector-wide credit normalization highlight the fragility of the current environment. Yet for investors who can distinguish between isolated missteps and systemic weakness, the bank's improving NIM, conservative credit practices, and alignment with sector tailwinds make it a compelling candidate. In a market that often overreacts to short-term noise, Zions offers a rare combination of caution and opportunity-a hallmark of contrarian value investing.