Zions Bancorp

Zions reported slightly underwhelming second-quarter results, with its adjusted earnings per share up 10% excluding noncore items. The bank’s shares traded down by around a low-single-digit percentage in after-hours trading on July 20 following its earnings release.

Why it matters: Loan growth of 3% year over year improved from last quarter's 2% pace, but remained tepid and fell short of the mid-single-digit growth implied by management's original 2026 guidance of "modestly increasing" loans. Loan growth has been sluggish and in the low-single-digit range for several quarters despite an attractive footprint in the West, which has higher population and GDP growth than the US overall. Commercial real estate lending turned a corner in the second quarter, rising 3% sequentially, while the consumer portfolio was essentially unchanged from the prior quarter.

The bottom line: As we incorporate its latest results, we don't expect to make a material change to our $66 fair value estimate for no-moat-rated Zions. We view shares as fairly valued. Zions' balance sheet is more asset-sensitive than most regional peers, meaning a potential rate hike would carry a larger theoretical positive impact on its profitability on its current balance sheet.

Big picture: Balance sheet growth is another important driver for net interest income, apart from net interest margin's sensitivity to interest rate changes. The bank's sluggish balance sheet growth will partially offset gains from a potential 25-basis-point increase in the federal-funds rate. Our base case assumes no rate hikes in 2026 or 2027, which applies to all the US banks under our coverage. We expect high-single-digit overall loan growth for US banks under our coverage, versus just 3.5% for Zions in 2026.

We are increasing our fair value estimate per share for Zions Bancorp to $70 from $68. Around $1 of the increase comes from the time value of money, and another $1 from higher interest income growth over the next five years as we update our interest rate outlook. Our base case scenario now includes a 0.25% increase in the federal-funds rate in December 2026 as well as the 0.25% hike in September 2026, and we expect the Federal Reserve to start cutting short-term interest rates in the second half of 2027. More importantly, our long-term rate assumptions remain unchanged. We note Zions is more rate sensitive than most of the other regional banks under our coverage. That said, higher funding costs will partially offset the benefit of higher earnings-asset yields. We expect the bank to grow its net interest income at a CAGR of 3.1% from 2025-30, up by 0.2% from our last update. Our fair value estimate is equivalent to 1.6 times the tangible book value at the end of second-quarter 2026, or 1.2 times when excluding the effects of AOCI.

Consistent with other regional banks, the key drivers of our valuation for Zions are growth in net interest income, growth in fee-based revenue, operating efficiency, and credit costs.

After a growth in net interest income of 8% in 2025, we project around 4.8% NII growth in 2026. We expect net interest margin to expand by around 9 basis points in 2026 to 3.30%, after an expansion of 21 basis points in 2025. Considering loan growth, another key driver of NII, we expect roughly 3.5% average loan growth over the next decade. Longer-term, we project Zions’ net interest margin to normalize to around 3.21%, reflecting our expectation of an upward-sloping yield curve and a midcycle federal-funds rate of around 2.5%. Taken together, our 10-year NII growth forecast is 3.2%.

On the fee income side, we forecast around 5% growth in core customer-related fees in 2026, mostly driven by retail and business banking fees, commercial account fees, and loan-related fees. We expect normalized customer-related fee income growth of around 3.2% in the long run.

Turning to the firm’s expense base, we expect roughly 4.4% growth in expenses in 2026, in line with the 4.5% growth in 2025. We forecast a normalized operating efficiency ratio of roughly 63.9%, which represents some improvement from the levels north of 65% seen in 2023 and 2024. However, given the bank’s limited scale and less-than-ideal deposit market share in many of its markets, we do not believe it can consistently reduce its efficiency ratio below 60%.

Finally, considering credit costs, we forecast Zions’ 2026 net charge-off ratio to be 0.11%, down from the 0.15% in 2025, with 2025's results negatively affected by $50 million in charge-offs related to two California commercial loans disclosed in the third quarter of 2025. We expect the firm’s net charge-off ratio to normalize around 0.24% through the cycle. Overall, we expect an average return on tangible common equity of 13.4% in the next 10 years, higher than our 8.9% cost of equity estimate for the firm.

We do not believe Zions Bancorp has carved out a moat, as we do not think the bank has durable cost advantages that are consistent with our bank moat framework. Zions has struggled to outearn our assigned cost of equity, or COE, of 8.9% in the past, although its return on tangible common equity, or ROTCE, has improved since 2018. After adjusting for AOCI, the bank’s ROTCE fell sharply to an average of just 10% in 2023 and 2024. While we forecast the bank to generate ROTCE in the low-teens on a normalized basis, the spread is thin when compared with its COE, and we are not confident enough that the bank can consistently outearn its 8.9% COE over the 10-year time horizon that would be suggestive of a narrow moat rating. We would like to see more improvement in the bank’s operating efficiency and more robust fee income businesses before considering awarding Zions a moat.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages coming from three primary factors: a low-cost funding base, excellent operating efficiency, and conservative underwriting. Regulatory costs must also be considered.

We thought Zions’ funding costs were superior to those of peer regional banks in the previous interest rate cycle (late 2015-19), but that advantage has narrowed in the current cycle. Zions’ cumulative interest-bearing deposit beta (change in rates paid on interest-bearing deposits/changes in the federal-funds rate) shot up to 60% from the fourth quarter of 2021 to the third quarter of 2024, 600 basis points higher than the average of our regional bank coverage. While the bank’s total funding costs remain below the regional peer average under our coverage, we believe some of this is attributable to the nature of its commercial, non-interest-bearing deposit base. To be more specific, Zions pays credit-rate adjustments (earnings credit allowances that reduce the fee income charged to these commercial clients), a common practice among commercial banks. For example, a bank might typically charge a fee for a service but instead waive it to adjust the overall cost of the deposit for the client. In effect, these arrangements might boost its reported cost of funding and net interest margins profile and reduce its fee income (making the efficiency ratio look worse), rendering it important to consider all three pillars of cost advantages as we evaluate a bank’s moatworthiness. While we expect Zions' overall funding costs to remain lower than peers, the edge has narrowed.

Considering the second pillar of our framework, operating efficiency, Zions has no advantage. The bank's efficiency ratio has improved from over 70% a decade ago, but we have a hard time seeing Zions consistently earning a mid- to high-50s efficiency ratio, the range moaty regional banks exhibit. Three factors explain this gap: smaller scale, the affiliate-bank operating model, and a less robust fee-income mix. Zions' scale is relatively small compared with most regionals under our coverage, and the bank does not hold the top deposit market share in its three largest markets, Utah, Texas, and California, which together comprise over 70% of its deposit base. A suboptimal deposit market share means Zions cannot effectively generate operating leverage on the fixed costs of running a branch network. The affiliate-bank structure compounds this problem: Zions' seven affiliated banks in each local market likely create duplicate spending, in contrast to the economies of scale a centralized bank spending would enjoy. Fee income adds a third drag, representing only around 22% of Zions' total revenue base, well below the 29% average among regionals under our coverage. A lower fee income mix means the bank cannot spread customer acquisition costs over more capital-light fee income businesses.

Regarding credit costs, we think Zions’ underwriting has improved since the GFC. The bank now has a centralized credit system despite its affiliate-bank business model. While local loan bankers and credit officers have on-the-ground relationships with their commercial clients, a large loan must be approved by the central credit team. In the more recent covid-related recession, Zions’ provisioning/net interest income was 3% on average from 2020 to 2021, better than the average of 10% of US banks under our coverage. With respect to Zions’ $50 million charge-offs related to two California commercial loans (0.08% of its loan book) in the third quarter of 2025, we think it is an isolated event and do not view it as indicative of overall credit issues. While Zions had lower credit costs than some of its regional peers in recent years, we do not view it as outweighing other pillars of our bank moat framework.

Lastly, regulatory costs matter both at the industry level and for Zions specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger post-crisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and still do. Our long-run outlook is positive given the US's stable democracy, steady GDP growth, and reserve currency status. Zions is not large enough to be subject to the Federal Reserve's stress tests, as its asset base is below $100 billion. Therefore, it arguably has one of the better regulatory cost positions among the regional banks we cover. That said, further regulatory requirements will be triggered if Zions surpasses $100 billion in assets, which we expect to happen in 2029. We believe the most important change to banks between $100 billion and $700 billion in assets is the inclusion of accumulated other comprehensive income, or AOCI, into bank common equity Tier 1 capital. We expect that Zions will handle this change well. The bank already has an adjusted CET1 ratio of 9.2% as of the end of June 2026, adjusted for AOCI, comfortably above its regulatory minimum of 7.0%.

Zions’ footprint in the Western US has attractive growth potential, and the bank could grow its balance sheet faster than its peers.

Zions could become an acquisition target as bank deal activity has picked up in the past several months.

Zions’ community bank service model could better cater to the needs of small and medium-sized business clients, which could drive superior deposit funding for the bank.

In the event of a recession, Zions would face lower balance-sheet growth and higher credit costs. Commensurate interest rate cuts would badly hurt the bank, which is extremely interest rate sensitive.

Zions’ asset base is relatively close to the Category IV bank threshold of $100 billion in assets, and incremental regulatory and technology spending could worsen the bank’s already poor operating efficiency ratio.

Fintech and other nonbank lenders are growing at a much faster rate than US commercial banks. Zions could struggle to grow its loans at the same pace as GDP growth.