KBRA Affirms Ratings for Zions Bancorporation, National Association

KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, the preferred stock rating of BBB, and the short-term deposit and debt ratings of K2 for Salt Lake City, UT-based Zions Bancorporation, National Association (NASDAQ: ZION) (“Zions” or “the bank”). The Outlook for all long-term ratings is revised to Stable from Positive.

Key Credit Considerations

Zions’ ratings are supported by an experienced management team that reflects extensive knowledge of the bank's attractive core Western and Southwestern markets, a strong deposit share position in many of these regions, and a loan portfolio that is well diversified and more granular than most peers. The bank’s current loan portfolio composition is partly a function of a strengthened risk management framework and disciplined underwriting; an improvement from some historic periods of episodic, concentration-related credit issues centered in commercial real estate during the GFC, and, in some respects, the energy sector during periods of downside oil price volatility.

Zions’ earnings performance trails that of similarly rated peers, due mostly to the bank’s comparatively lower yielding loan portfolio and less levered balance sheet. While Zions’ asset-sensitivity benefitted NIM in 2022 (reflected in the ~90 bp increase in NIM over the course of the year), the more competitively priced deposit market in 2023, particularly after the March U.S. bank stresses, resulted in a larger quantity of interest-bearing deposits and overwhelmed the benefits of loan yields repricing higher. NIM declined to 2.93% during 3Q23, down 60 bps from 4Q22, and appears to have stabilized. Despite an industry consistent change in the composition of the deposit base towards more interest-bearing deposits, Zions’ funding profile continues to be supported by core deposits which have traditionally represented a significant majority of the bank’s total funding (87% at 3Q23), highlighted by a peer leading amount of noninterest bearing deposits (35% of total deposits), although this level has fallen from averages of 44% of total deposits pre-pandemic (2015-2019) and 49% from 2020-2022.

We continue to assess Zions’ capital management as adequate for its risk profile. While an elevated dividend payout ratio and share repurchases, in combination with strong loan growth, reduced the company’s CET1 ratio from a peak of 11.7% in 2016 to a low of 9.6% at 3Q22, after the events of March 2023, management committed to higher capital over the near term, and suspended share repurchases, which has benefitted growth in the CET1 ratio to 10.2% at 3Q23. Based on management commentary, we anticipate that this trend will continue into 2024. The bank’s TCE ratio (4.4% at 3Q23) is below many peers due to unrealized AOCI losses related to the securities portfolio, and these losses are expected to remain unrealized. Overall, in our view, the bank’s core capital levels remain adequate, particularly given the lower-risk loan portfolio and strong reserve levels (LLR / Loans HFI ratio of 1.2% at 3Q23), which provide the bank with ample loss absorbing capacity.

Rating Sensitivities

The revision in Outlook to Stable from Positive indicates that a rating upgrade is unlikely over the medium term. Deterioration in asset quality and related operating performance that goes beyond KBRA’s expectations could pressure ratings. More aggressive capital management than anticipated could also cause negative rating action.

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