Fitch Affirms Zions at 'BBB-/F3'; Outlook Revised to Positive

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

The Positive Outlook reflects Fitch's observation that management has begun making notable progress in addressing the company's strategic objectives which is expected to lead to persistently improved core earnings over the rating time horizon. Fitch believes this progress has been made while not increasing risk appetite. Moreover, the Outlook revision reflects Fitch's expectation that asset quality issues related to the energy sector should continue to be manageable.

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), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), 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, VR AND SENIOR DEBT

Today's rating affirmation reflects ZION's sustained, solid franchise in the Western United States, its strong liquidity and funding profile and maintenance of adequate capital. ZION's rating remains lower than its peers' and toward the lower end of its long-term rating potential due to the company's continued weak earnings performance and, relatively limited company profile.

In early 2Q15, management announced a major strategic initiative in order to address the company's relative earnings underperformance. The plan included costs saving actions such as consolidating its seven bank charters into one and consolidating risk and other back-office functions. Moreover, the plan called for both growing and diversifying its level of noninterest income with the creation of a position with ZION's organizational structure. Management communicated that it would be using the company's large levels of cash and gradually investing in securities in order to stabilize and grow interest revenue.

Although the plan has been in place just over one year, ZION's core financial performance is improving and is expected to continue to improve such that an Outlook Positive is warranted. The bank is tracking on its expense and revenue goals through execution on simplifying its operating structure and focusing on revenue generating business lines. ZION's adjusted efficiency ratio (which takes out debt extinguishment costs, gains and losses from sales of investments, etc.) has improved from 71.5% through 2Q15 to 66.5% through 2Q16. Fitch would expect this level to come down further throughout 2016 and into 2017 as additional efficiencies are found and revenue is bolstered by modest loan growth, additional securities purchases and potentially another rate hike.

As expected, ZION's credit quality has been pressured over recent periods due to its exposure to the energy sector. Energy-related credits made up around 6% of total loans at 2Q16, one of the highest levels in the large regional peer group. Moreover, loans to oil field service companies which have experienced larger loss rates through this cycle, make up over a quarter of the energy-related book, an outsized level relative to peers. Depressed oil and gas prices have pushed energy-related nonaccruals to 11% of the energy book at 2Q16, up from 2.3% a year prior. Over the last five quarters, net charge offs (NCOs) within the portfolio have averaged 3.5%.

Still, Fitch recognizes that ZION, like its peer banks with notable energy exposure, has been able to adequately control credit losses on the whole and the impact on earnings and capital has been manageable. Excluding energy, NCOs during the last five quarters has a median of only one basis point annualized. Moreover, while the total volume of nonperforming assets (inclusive of accruing troubled debt restructured [TDRs]) have increased 46.8% year-over-year, non-energy-related NPAs have continued their steady descent, falling 14.5% during the same time period. ZION's total level of NPAs was 1.7% of loans and other real estate owned at 2Q16, a lower level than many higher rated peers. Fitch's expectation that overall credit costs and NPAs will remain manageable is incorporated into today's affirmation as well as the Outlook revision.

Fitch views capital levels as adequate in light of the company's current rating, balance sheet composition and earnings performance. ZION had the second highest CET1 ratio at 2Q16 within the peer group. The company once again passed this year's annual regulatory stress test on both quantitative and qualitative grounds. Still, Fitch views stress testing results as indicative of the company's on balance sheet risk as well as its weak earnings performance and earnings profile. Capital erosion under the severe adverse scenario has been the highest of all larger regional peers for three years straight. In Fitch's view, these results point to the need of having higher than average capital going forward. This expectation is incorporated into today's rating action.

ZION continues to have a strong liquidity and funding profile which supports its rating. At 2Q16, its loan-to-deposit ratio stood at 85%, well below the peer median. It also has one of the lowest levels of wholesale funding dependence and highest levels of noninterest bearing deposits to total deposits relative to peers, both credit positives. This funding profile has resulted in deposit costs historically below peer averages and is the result of ZION's strong commercial and small business banking franchise within its core markets.

SUPPORT RATING AND SUPPORT RATING FLOOR

ZION has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, ZION is not systemically important, and therefore the probability of support is unlikely. Issuer Default Ratings (IDRs) and Viability Ratings (VRs) do not incorporate any support.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

ZION's subordinated debt is notched one level below its VR of 'bbb-' for loss severity. ZION's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while ZION's trust preferred securities are notched four times from the VR (two times from the VR for loss severity and two times for non-performance). These ratings are in accordance with Fitch's criteria and assessment of the instrument's non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

ZION's uninsured deposit ratings are rated one notch higher than its 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.

HOLDING COMPANY

ZION's 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 failure and default probabilities.

RATING SENSITIVITIES

IDRS, VRs AND SENIOR DEBT

Fitch has revised its Rating Outlook for ZION to Positive from Stable, indicating the likelihood of a rating upgrade in the next 12 to 24 months.

Fitch believes ZION's ratings are at the lower end of their potential range given its capital and liquidity levels and solid franchise. Fitch expects ZION's core earnings power to remain relatively weak compared to higher rated peers in the near term. As Fitch observes strategic initiatives continuing to take hold resulting in earnings performance and an earnings profile consistently in line with those banks in higher rating categories, positive rating action would be likely. Although unexpected, to the extent that earnings remain depressed and Fitch foresees little uplift over the long term, ZION's Outlook could be revised to Stable from Positive.

Embedded within the Positive Outlook is Fitch's expectation that capital will be managed appropriately. Rating or Outlook pressure could result if ZION were to manage capital more aggressively in payout levels or through growth. Should the company have governance and/or risk management issues or a failed CCAR result on a quantitative basis, Fitch would likely take negative rating action, although this is not expected.

Also incorporated within today's Outlook revision is the expectation that ZION's energy exposure will continue to have nominal impact on the bank's earnings and capital. Fitch expects some additional deterioration in ZION's energy-related loan portfolio. However, if asset quality deterioration within the book is outsized relative to peer banks, measured by percentage increases in nonperforming loans or net charge-offs, pressure could be placed on ZION's rating or Outlook.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since ZION's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for ZION and its operating companies' subordinated debt and preferred stock are sensitive to any change to ZION's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to ZION's long- and short-term IDR.

HOLDING COMPANY

Should ZION's 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 Fitch could potentially notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has affirmed the following ratings:

Zions Bancorporation

--IDR at 'BBB-'; Outlook Positive;

--Short-term IDR at 'F3';

--Viability Rating at 'bbb-';

--Senior unsecured debt at 'BBB-';

--Subordinated debt at 'BB+';

--Short-term debt at 'F3';

--Preferred stock at 'B';

--Support Rating at '5';

--Support Floor at 'NF'.

Z.B., NA

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

--Short-term IDR at 'F3';

--Viability Rating at 'bbb-';

--Long-term deposits at 'BBB';

--Short-term deposit at 'F2';

--Support Rating at '5';

--Support Floor at 'NF'.

Zions Institutional Capital Trust A

--Preferred Stock at 'B+'

Additional information is available on www.fitchratings.com.

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135

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Contacts

Fitch Ratings
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Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst:
Julie Solar, +1-312-368-5472
Senior Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations:
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Contacts

Fitch Ratings
Primary Analyst:
Bain K. Rumohr, CFA, +1-312-368-3153
Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst:
Julie Solar, +1-312-368-5472
Senior Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations:
Hannah James, + 1 646 582 4947
New York
hannah.james@fitchratings.com