Zions Bancorp (ZION): Upgrading to Outperform, see $40-45/share value – Credit Suisse

Credit Suisse’s U.S. Regional banking team is out with some positive comments on Las Vegas commercial real estate following meeting with a host of industry professionals.

– Firm is upgrading Zions Bancorp (NASDAQ:ZION) to Outperform with $32 price target (prev. $26) noting they believe the stock will trade up to $40-$45 or roughly 12x by mid-2013.

CSFB notes their conclusion after meeting with a host of industry professionals is that Las Vegas (LV) commercial real estate prices are in the process of stabilizing, and they expect loan balances in aggregate to start growing by 2013. Specifically, projected revenue increases on the gaming/leisure front (key driver of the Las Vegas economy) lead them to believe that commercial real estate prices are nearing a bottom, and in certain cases (class ‘A’ properties), have likely overshot on the downside.

* Firm expects ZION’s 1Q11 EPS to beat consensus expectations, driven by a sharp decline in net charge-offs. Estimate TARP repayment in 2H11 with low level of common equity issuance (< 25% of TARP, depending on regulatory credit for prior capital actions). They also forecast above consensus EPS in 2012, driven mainly by balance sheet optimization (preferred stock / sub-debt reductions), and positive loan growth. After their tour of the Las Vegas Bank / Real Estate Market on 3/17-3/18 (including ZION’s Nevada State Bank, contributes 23% of ZION’s CRE NPLs), firm’s confidence has increased that ZION’s aggregate NPL/NCO/OREO expense levels will improve, and +3% y/y loan growth can return by 2012.

While ZION’s Nevada subsidiary (the Nevada State Bank) only represents 8% of its total assets and deposits, it contributes 23% to the bank’s total CRE NPLs – so is important for forecasting NCOs/NPAs. This bank is mostly a middle market commercial lender and class B commercial real estate lender, and competes mostly with local banks.

Management believes they are nearing the end of the credit cycle (~7th inning), with classifieds down 60-70% from the ’09 peaks, 10% reserve to loan coverage, and a construction portfolio down to $42M. CSFB estimates NCOs from this subsidiary will steadily decline, reaching under 1.5% of loans by 2013.

They estimate that the Nevada State Bank could start seeing overall loan growth turn positive by late 2012, as its seeing strong C&I production (taking share from weak/failing competition) which is offsetting some of the declines in its investor CRE/construction balances.

Investment Thesis Summary

  1. Forecast 40% upside over 12-months, 90% upside until mid-’13 (~2 years)

CSFB estimates 2014 normalized EPS of $3.50 to $3.70 which assumes a 1.2% ROA, 12% ROE, CET1 of 9.5 – 10.0%, and a loan balance of $44B (up 21% over four years). They believe the ZION stock will trade up to $40-$45 or roughly 12x by mid- 2013. If they discount this value back two years at 15%, the yarrive at their $32 12-month target price.

The Three Stages of Earnings Improvement:

  1. Net charge-offs over the next two quarters (more modest, steady improvement for 2H11 – 2013)
  2. Balance Sheet optimization (sub-debt, preferred reduction, cheaper debt issuance) in 2H11 – 2015
  3. Strong Loan Growth in 2012 – 2014 (negative impact from construction and FDIC assisted run-off portfolios will be diminished, geographic secular drivers will lead in C&I and owner-occupied CRE segments)

In-line relative valuation: ZION trades at a 20% discount to peers on normalized earnings and current tangible book. CSFB’s $32 TP is 8.9x firm’s normalized EPS estimate.

Notablecalls: CSFB’s team has done some qualitative work & the results are quite interesting. I think the $32 price target & $40-45 upside will create significant interest in the name in the near-term.

The stock looks & feels ready to go.

I’m thinking this one could go $24 as soon as today. Don’t see much point paying up in the pre-market, would rather buy size after open. Use pullbacks to accumulate.

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