Zions Bancorp NA (ZION) Q4 2024 Earnings Call Highlights: Strong Revenue Growth Amid Credit Concerns

Zions Bancorporation, National Association (ZION), a diversified financial service provider, reported strong revenue growth in its Q4 2024 earnings call, despite lingering credit concerns. The bank's unique holding company structure and conservative approach to loan quality and funding sources have contributed to its robust financial performance. This article will delve into the key factors driving Zions Bancorporation's revenue growth, the sustainability of this growth, and the influence of its loan portfolio composition on credit quality and risk management practices.



Key Factors Driving Zions Bancorporation's Revenue Growth

1. Moderate and Stable Growth: Zions Bancorporation has been growing at a moderate rate over the past several years, with its revenue increasing by 11.35% year-over-year as of September 30, 2024. This growth is not only recent but has been consistent over time, indicating a stable trajectory.
2. Diversified Business Model: Zions operates through seven separately managed and branded segments, offering a full range of traditional banking services, wealth management, and private client banking services. This diversification helps the bank to tap into various revenue streams, reducing the impact of any single segment's performance on the overall revenue.
3. Core Deposit Funding: Zions primarily uses core deposit funding, which is less risky and more stable than competitive wholesale or non-core sources of funding. As of third quarter 2024, deposits well exceeded loan totals, with a loan-to-deposit ratio of 77.7%. This stable funding base supports the bank's revenue growth.
4. Broad Loan Mix: Zions has a broad loan mix, with no single segment dominating its loan portfolio. As of third quarter 2024, the loan mix was: Commercial Real Estate 28%, Commercial & Industrial 23%, Residential 23%, Construction & Development 7%, Multifamily 4%, and 12% categorized as Other. This diversification helps mitigate risk and ensures a steady flow of interest income.
5. Strong Capital Ratios: Zions maintains strong capital ratios, with its current CET1 ratio around 10.71% and the risk-based capital ratio at 13.21%. These robust capital ratios indicate the bank's financial strength and ability to withstand potential economic downturns, supporting its long-term revenue growth.
6. Consistent Net Interest Income Generation: Zions has demonstrated very stable and consistent net interest income generation, with net interest margins remaining stable over the past year. In the most recent quarter, net interest income rose to $620 million, a 9% increase from the prior year period.



Sustainability of Zions Bancorporation's Revenue Growth

The sustainability of Zions Bancorporation's revenue growth in the long term is supported by several factors:

1. Demonstrated Cost Control Effectiveness: Zions has shown an ability to control costs, with revenue growth outpacing expense growth by a factor of more than 2x in the most recent quarter. This operating leverage resulted in a 19% increase in adjusted pre-provision net revenue.
2. Strong Collateral and Guarantor Support in the Loan Portfolio: Zions' loan portfolio has strong collateral and guarantor support, which helps mitigate credit risk and ensures the sustainability of interest income.
3. Improving Net Interest Margin Trajectory: Zions' net interest margin has been improving, which contributes to the sustainability of its revenue growth.
4. Regulatory Compliance: Zions' unique structure, without a holding company, and its size below the $100 billion threshold for category IV banks, help it avoid more stringent regulatory oversight and maintain higher capital ratios. This compliance supports the bank's long-term sustainability.

Influence of Zions Bancorporation's Loan Portfolio Composition on Credit Quality and Risk Management Practices

Zions Bancorporation's loan portfolio composition, particularly its commercial real estate (CRE) exposure, plays a significant role in its credit quality and risk management practices:

1. CRE Loan Quality: Zions Bancorporation maintains a strong focus on the quality of its CRE loans. According to the bank's rebuttal to Moody's, 79% of its CRE holdings are term loans, with the remaining 21% classified as construction loans. Within the office CRE segment, only 9.7% of loans are criticized, 7.7% are classified, 3.1% are nonaccrual, and delinquencies are just 1.2%. Year-to-date net charge-offs for CRE loans are a mere $6.1 million.
2. Diversification: Zions Bancorporation's CRE portfolio is diversified across various sectors, with multifamily (29%) and industrial (22%) being the largest segments. This diversification helps mitigate risks associated with any single sector or geographic area.
3. Risk Management Practices: The bank's risk management practices are evident in its loan-to-deposit ratio, which was very low at 77.7% as of the third quarter of 2024. This indicates that the bank has a strong deposit base to support its lending activities. Additionally, brokered deposits make up less than 10% of the total amount of deposit funding, and wholesale funding makes up less than 14% of total funding. This reliance on core deposit funding reduces the bank's exposure to higher-risk, competitive wholesale or non-core sources of funding.
4. Credit Quality Concerns: While Zions Bancorporation's CRE exposure appears well-managed, there are some concerns regarding credit quality. In the fourth quarter of 2024, the bank reported an annualized net loan loss rate of 0.24%, with two-thirds attributed to a single commercial & industrial credit. Additionally, classified loans within the commercial real estate portfolio increased, warranting monitoring, especially given broader commercial real estate market challenges.

In conclusion, Zions Bancorporation's strong revenue growth is driven by a combination of factors, including moderate and stable growth, a diversified business model, core deposit funding, a broad loan mix, strong capital ratios, and consistent net interest income generation. The sustainability of this growth is supported by demonstrated cost control effectiveness, strong collateral and guarantor support in the loan portfolio, an improving net interest margin trajectory, and regulatory compliance. However, investors should monitor the commercial real estate exposure and potential credit quality deterioration, as these could impact future performance despite management's confident outlook.