Fitch Affirms Zions Bancorp's L-T IDR at 'BBB-'; Revises Rating Outlook to Stable

CHICAGO--()--Fitch Ratings has affirmed Zions Bancorporation's (Zions) Issuer-Default Ratings (IDRs) at 'BBB-/F3'. The Rating Outlook has been revised to Stable from Positive.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), UnionBanCal Corporation (UBC), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS - IDRs, VIABILITY RATINGS (VR) & SENIOR DEBT

The affirmation of Zions' ratings is reflective of a good franchise largely spanning many western U.S. states and Texas as well as continued improvements in asset quality metrics. However, Fitch continues to note that Zions' ratings remain at the lower end of their potential range for reasons discussed below.

Fitch has revised the Rating Outlook for Zions' ratings to Stable from Positive. The Outlook revision is largely due to continued underperformance relative to peer banks.

Additionally, Fitch believes Zions' difficulty managing the Federal Reserve's CCAR process last year relative to other banks who navigated it more successfully also helps to support the Outlook revision to Stable.

In the wake of this, Zions re-submitted its capital plan to the Federal Reserve and received approval for the re-submitted plan in late July 2014. The company then raised $525 million of common equity.

While Fitch notes that the equity raise helps to provide a cushion to creditors for unexpected loss, it is also somewhat necessary given the company's comparatively concentrated loan portfolio by both product and geography.

As previously noted, Zions' earnings profile remains below many banks in its large regional peer group, and is a key factor keeping the rating at the lower end of its potential range.

Fitch believes some of the earnings lag is due to Zions' running a higher cost decentralized operating model than peers as well as growing regulatory expenses and less of a benefit from scale due to Zions' comparatively smaller asset size. Fitch would also note the earnings lag is in part due to an abundance of liquidity impacting the company's net interest margin (NIM).

While Fitch does not expect much of a change or benefit in the first two components of the earnings lag, Fitch does note that Zions' balance sheet is very asset sensitive and positioned for rising rates, particularly in an up 300 basis point scenario.

That said, Fitch would also note that this interest rate positioning is comparatively more aggressive than some peer banks, particularly given Zions' significant commercial deposit base. On balance, Fitch believes that banks with more commercial deposits may be more sensitive to deposit repricing pressures in a rising rate scenario than banks that are more consumer deposit funded institutions.

Helping to support Zions' ratings is continued improvements in the company's asset quality metrics alongside the rest of the banking industry. That said, Fitch believes that asset quality metrics for Zions -- as well as the rest of the industry -- are nearing or at a cyclical trough, and Fitch would expect some reversion in asset quality metrics over a medium-to-intermediate term time horizon. The expectation for this reversion is already incorporated in Zions' current ratings.

RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT

As previously noted, Zions ratings are at the lower end of their potential rating range given the many challenges the company has endured over the last few years.

With the Rating Outlook revision to Stable from Positive, Fitch is indicating that Zions' ratings are well situated over a near-to-intermediate term time horizon.

Over a longer-term time horizon, should the company's risk management processes and procedures continue to season, and should its earnings performance approach peer averages all while holding capital ratios at least constant (including the recent equity raise), there could be some very modest upwards rating momentum.

While Fitch does not see much downward rating pressure to Zions' ratings, should the company's asset quality metrics deteriorate at a rate that is faster than peer averages over a medium-to-long-term time horizon, or should the company have additional governance and/or risk management issues, there could be pressure on the Rating Outlook.

KEY RATING DRIVERS - HOLDING COMPANY

Zions' IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.

RATING SENSITIVITIES - HOLDING COMPANY

Should Zions' holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that Zion may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

Zions has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, Zions is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

Zions Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by Zions and by various issuing vehicles are all notched down from Zions' or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by Zions and its subsidiaries are primarily sensitive to any change in Zions' VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs for Zions bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of Zions' main bank subsidiaries are equalized across the group.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of Zions to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in Zions' IDRs.

To the extent that one of Zions' subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from Zions' IDR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

Zions uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by Zions and its subsidiaries are primarily sensitive to any change in Zions long- and short-term IDRs.

Fitch has affirmed the following ratings:

Zions Bancorporation

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Short-term IDR at 'F3';

--Viability at 'bbb-';

--Senior unsecured debt at 'BBB-';

--Subordinated debt at 'BB+';

--Short-term debt at 'F3';

--Preferred stock at 'B';

--Support at '5';

--Support Floor at 'NF'.

Zions First National Bank

Amegy Bank N.A.

California Bank & Trust

Commerce Bank of Oregon (The)

Commerce Bank of Washington (The)

National Bank of Arizona

Nevada State Bank

Vectra Bank Colorado NA

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Viability at 'bbb-';

--Long-term deposits at 'BBB';

--Short-term deposit at 'F2';

--Support at '5';

--Support Floor at 'NF'.

Zions Institutional Capital Trust A

--Preferred Stock at 'B+'

The Rating Outlook has been revised to Stable.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 1Q14' (April 1, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891936

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Contacts

Fitch Ratings
Media Relations
Brian Bertsch, New York
Tel: +1 212-908-0549
Email: brian.bertsch@fitchratings.com
or
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560

Contacts

Fitch Ratings
Media Relations
Brian Bertsch, New York
Tel: +1 212-908-0549
Email: brian.bertsch@fitchratings.com
or
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560