OREANDA-NEWS. Fitch Ratings has affirmed Zions Bancorporation's (ZION) ratings at 'BBB-/F3'. The Rating Outlook remains Stable.

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.



Today's affirmation reflects ZION's solid franchise in the Western United States and maintenance of adequate capital in light of stress-testing and expected asset quality pressure from the prolonged period of low energy prices. ZION's rating remains lower than peers and toward the lower end of its long-term rating potential due to the company's continued weak earnings performance.

The Stable Outlook reflects Fitch's expectation that earnings challenges will persist in the near-to-intermediate term relative to peer banks. Moreover, the Stable Outlook reflects Fitch's expectation that asset quality issues related to the energy sector should be manageable.

Fitch views ZION's tepid current and expected earnings performance as a primary rating driver and a rating constraint. Even when stripping out one-time expense items such as realized losses on the sale of the company's collateralized debt obligations (CDOs) over recent quarters as well as debt-extinguishment costs, performance is relatively weak. Fitch notes that the median ROA for the large regional peer group through second quarter 2015 (2Q15) was 1.06% compared to ZION's of 38 basis points (bps). Stripping out one-time costs, Fitch estimates ZION's return on asset (ROA) at just under 70bps, still well-below peers.

In late 2Q15, management announced a major strategic initiative in order to address the company's relative earnings underperformance. The plan includes actions such as consolidating its seven bank charters into one, consolidating risk and other back-office functions and creating a position with the organizational chart to lead ZION's efforts in growing and diversifying its level of noninterest income.

Fitch generally views this strategic initiative favorably given some of the efficiencies that should be gained as well as the potential impact that additional fee income could have on ZION's operating results. Still, Fitch notes that the plan is still in its early stages and has not been fully executed upon yet. Therefore, rating actions will be predicated on evidence of successful execution on this and future strategic initiatives.

Fitch views capital levels as adequate in light of the company's current rating, balance sheet composition and earnings performance. After quantitatively failing the Fed's CCAR process in 2014, ZION passed this year's annual stress test, albeit by just 10bps. ZION's Tier 1 Common capital ratio of 5.1% was the lowest result in this year's stress test and over 200bps lower than the peer median under the severely adverse scenario. Fitch also notes that ZION had the largest decline in its Tier 1 Common capital ratios in both the 2014 and 2015 stress tests.

The divestiture of the company's remaining CDO book should be a net positive for stress testing going forward given how the investments were treated from a loss content and risk-weighting perspective. Still, Fitch views this year's and last year's results as indicative of the company's balance sheet risk as well as its weak earnings performance which is unable to augment capital levels as much under a stress scenario compared to higher rated peers.

ZION's asset quality remains good and has shown continued improvement year-over-year. However, Fitch notes that credit quality will likely be pressured over the near to intermediate term due to the company's exposure to the energy sector. Loans energy-related companies make up around 7% of total loans, the second highest level in the large regional peer group. The book has performed relatively well thus far and the shared national credit exam did not sure to an outsized provision to the allowance or significant downgrades. Nevertheless, Fitch expects credit quality deterioration to percolate going forward as energy prices remain depressed and borrower cash flows are stressed. This expectation is incorporated into today's rating action.

Moreover, Fitch expects deterioration in ZION's commercial real estate (specifically, loans collateralized by office buildings) and multifamily portfolios given the secondary and tertiary economic impact to some of the company's core operating markets in Texas and the Southwest. However, Fitch expects ZION to reasonably control credit losses on the whole and for the impact on earnings and capital to be manageable. This expectation is supported by what Fitch views as solid underwriting of energy credits evidenced by fairly nominal credit losses during previous energy cycles.


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 instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.


The uninsured deposit ratings of ZION are rated one notch higher than ZION'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.


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.


The IDRs and VRs of ZION's bank subsidiaries are equalized with ZION's IDR reflecting Fitch's view that they benefit from the cross-guarantee mechanism in the U.S. under FIRREA.


ZIION 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. IDRs and VRs do not incorporate any support.



As noted above, Fitch believes ZION's ratings are at the lower end of their potential range. Over the intermediate to longer term horizon, modest positive rating momentum would likely be driven by a convergence of earnings performance with higher rated peers while maintaining strong capital levels and adequate risk controls. Specifically, to the extent that Fitch observes the strategic initiatives mentioned above gaining traction and resulting in positive operating leverage while capital is managed conservatively and regulatory hurdles such as stress-testing are passed both quantitatively and qualitatively, positive rating action could ensue.

Fitch does not expect so see downward rating pressure on ZION in the near term. However, if asset quality deterioration 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. Moreover, should the company have governance and/or risk management issues such as a failed CCAR result on a quantitative or qualitative basis, Fitch would likely take negative rating action.


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


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


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 is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.


As the IDRs and VRs of the subsidiaries are equalized with those of ZION 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 ZION's IDRs.


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.

The rating actions are as follows:

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+'