Zions Bancorp (ZION) Holds Steady as Financials Fail

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best stocks to buy iconAs I mentioned in my last update, I selected regional lender Zions Bancorporation (NASDAQ: ZION) as my pick for the best stock for 2011 at a time when financials stocks were enjoying a surge of buying interest. Although the market’s focus shifted elsewhere in the months that followed, financial stocks have avoided the brunt of the selling pressure that has pressured the major averages over the last two weeks.

And that’s good news since I still think ZION holds great potential as the company return to health after recovering from the 2008 housing crash and financial crisis. The company’s latest earnings report bore this out: ZION reported Q1 operating earnings of seven cents per share vs. the 17 cent loss analysts were expecting and last year’s 49 cent loss.

More importantly, as I touched on in my ZION stock update a month ago, loan losses continued to decline as the real estate market in the Southwest region stabilizes. Net loan charge offs dropped 44% to $141 million vs. $251 million in the fourth quarter of 2010. That’s a huge quarter-over-quarter sequential decline and presages future earnings power. As a result, executives released some of their loan loss reserves, which dropped to $60 million from $173 million in Q4.

zion stock

Investors were pleased, with shares up nearly 5% from their pre-earnings levels. Analysts were happy too, with the team at FBR Capital upping their share price target form $22 to $30 (which would be worth a 25% rise from current levels) on better credit trends. They also noted that ZION is well positioned for loan growth and rising interest rates.

FBR analysts are overall warming to regional banks given their leverage to commercial and industrial lending and improved loan performance. ZION is one of their top picks in the sector.

Looking forward, management guided Q2 loan growth of flat to modestly positive vs. Credit Suisse’s estimate for a small decline. Also, the company is set to hold discussions with Federal regulators on the repayment of TARP bailout funds later this quarter with actual repayment in Q3. Repayment will reduce the need to raise fresh capital from private investors and remove the risk of shareholder dilution.

Overall, ZION’s fundamentals continue to improve as it recovers from its near death experience back in 2009 when shares traded as low $5.87. Shares should benefit from a tailwind soon as financial stocks stabilize and end four months of relative weakness against the broad market.

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The author can be contacted at anthony@edgeletter.com. Feel free to comment below.

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