Zions Stock has turned its business to profitability (NASDAQ:ZION)
Zions Bancorporation, North America (NASDAQ: ZION) is a regional bank with over $92 billion in total assets. While banks are often criticized for lackluster growth and returns, Zions has been able to grow its assets and improve its profitability to achieve industry-leading numbers. The company has invested in technology to reduce costs, speed up transactions and improve profitability. The bank went from being one of the least efficient banks in the country to having an industry-leading efficiency ratio. Zions remains cheap relative to the market, at a time when the economic conditions for higher profitability are better than they have been in over a decade.
The Growing Profitability of Zions
Zions improved its return on tangible equity (ROTE) from 3.29% in 2012 to 15.01% for the first nine months of 2021, with a 10-year average ROTE of 7.69%. Return on equity (ROE) has averaged 6.97% over the decade, but this sub-optimal performance over the decade masks its recent outperformance. Its Q3 2021 ROE of 14.77% exceeded the industry average ROE of 12.05%. Aside from 2020, the period since 2018, Zions has achieved double-digit ROE.
Returns on assets (ROA) have averaged 0.74% over the period 2012 to 2021. However, since 2017 the ROA has averaged 1%, with an ROA for the first nine months of 2021 of 1.24%, its Q3 2021 ROA of 1.37% beating the industry ROA of 1.21%. The company hit a milestone in profitability, while growing conservatively, growing its assets by a 10-year CAGR of 4.92%. Tangible book value per share has grown from just over $20 in 2012 to $38.42 in 2020 and $39.89 for the first nine months of 2021, representing just under 6% annually. Zions has a tangible price-to-book ratio of 1.87 for the last twelve months (TTM).
Since 2016, the company’s profitability has greatly improved. During this period, while revenue grew less than 6% from nearly $2.5 billion in 2016 to nearly $3.5 billion during the TTM period, earnings from The company’s net after-tax (NOPAT) operating income has fallen from over $445 million to approximately $1.35 billion. , compounded at more than 20% per year. During this period, the company widened its NOPAT margin from 18% in 2016 to 39.7%.
Zions’ improved profitability allowed it to grow its free cash flow (FCF) from -$37 million in 2016 to nearly $1.3 billion during the TTM period, accumulating nearly 0 $.9 billion of FCF during this period, or 43% of its current market capitalization. The company has an FCF yield of 10.3%, having grown more than 216% from 2020. The company’s fast-growing FCFs are available at very attractive rates and indicate a healthy underlying economy. These numbers also tell us that the company can sustain its share buyback program, including $50 million in stock buybacks scheduled for Q1 2022, as well as its dividend policy (currently set at $0.38 per common share).
Net interest margins are bearable
According to the company Q3 2021 reportZions net interest margin (NIM) this quarter was, at 2.68%, higher than the average NIM for U.S. banks at that time, which was 2.56% for all banks and just over 3% for banks with assets between $10 billion and $250 billion. Overall, NIMs have remained in a narrow range of between 3% and 3.5% for banks the size of Zions ($10 billion to $250 billion in assets) since the Great Recession. This suggests that NIMs and bond yields are uncorrelated. With rising bond yieldsfears of pressure on the NIMs have largely faded.
Technology investments will make the business more profitable
Over the past decade, the bank has invested heavily in technology to replace its old basic lending and deposit systems. Traditional banks use largely outdated processing systems, which puts some at risk of fintech disruption. Zions completed transitioning its lending system to a modern system in 2019 and expects to complete transitioning its deposit system in 2022.
In the business Review of the year 2019Zions President and CEO Harris Simmons said:
Replacing basic lending and deposit systems is very tedious and difficult work. We believe this is a situation that almost all banks will face over the next few years. In fact, in recent months several major banks have announced that they are evaluating the replacement of some of their core systems. We are happy to be leading the pack.
The company is indeed ahead of many banks in embracing the modernization of its core lending and deposit systems, which has given it a significant advantage to compete with much larger banks. According to the Small Business Administration, in the first year of the Paycheck Protection Program (approvals through 8/8/2020), Zions processed nearly 48,000 loans with a total value of over $7 billion. This was the ninth highest amount processed under the program.
This success is based on the bank’s ability to process transactions faster than ever, because, for example, rather than manually entering customer data during the loan application process, the data can be extracted from the system, which facilitates the fulfillment of the request.
Technology will and has led to greater savings. Zions’ effectiveness rate has been competitive, going from over 60.2% in Q1 2019 to 59.8% in the third quarter of 2021. During this period, the average efficiency ratio of the American banking sector fell from 56.09% to 63.39%. Zions is no longer one of five least efficient banks in America in 2012, when it had an efficiency rate of 72%, to one of the most efficient.
With a price-to-earnings (P/E) ratio of 10.92, Zions is undervalued relative to the S&P 500, which has a P/E ratio of 25:25. The company’s FCF yield of more than 10% values its FCF very cheaply, despite the company’s aggressive FCF growth. Improving economic conditions suggest that Zions, along with many other banks, will be able to increase their profits in this time of inflation.
Zions has gone from being one of the least efficient banks in the country to delivering industry-leading numbers, thanks to its technology investments. These investments have taken place at a time when the company has done well to become a more profitable bank. These investments will lead to further improvements in profitability and allow it to compete with the big banks. The bank’s undervaluation provides investors with an opportunity to buy a bank with a rapidly improving economy at a very cheap price relative to the market.