More troubling news for Zions Bank: It may face a ratings downgrade. Here’s what that could do.

Utah-based institution could end up paying more to borrow money.

(Chris Samuels | The Salt Lake Tribune) A Zions Bank branch in Cottonwood Heights, Monday, March 13, 2023.

A leading credit-rating service has downgraded its confidence in Zions Bank and the wider U.S. banking sector after the sudden collapse of several large banks.

Moody’s Investors Service announced late Monday it had placed the Utah-based bank holding company and five other regional banks under review for possible downgrades in some of their credit ratings, a move it said reflected “the extremely volatile funding conditions for some U.S. banks exposed to the risk of uninsured deposit outflows.”

The warning came after regulators took control late last week of collapsed Silicon Valley Bank in California, followed by Silvergate Bank, also in California, and New York-based Signature Bank while scrutiny turned to other financial institutions over their potential for similar vulnerabilities.

Shares in Zions Bancorp scored gains early Tuesday after heavy stock losses the day before for a host of regional banks, triggered by the bank failures.

Its share price closed at $31.30 on Tuesday, up 4% over Monday’s $29.97 close, in what was its largest one-day decline in three years. That price fell as low as $22.55 early Monday.

Moody’s said it had placed all long-term ratings and assessments of Zions Bancorp under review. Downgrades in the agency’s creditworthiness report card could carry the risk of making it more costly for Zions to borrow money.

A spokesperson at Zions Bank did not respond Tuesday to an inquiry seeking additional comment.

Fed poised to boost interest rates

One of three top U.S. ratings agencies, Moody’s issued similar downgrade notices late Monday for Comerica Inc., First Republic Bank, Western Alliance Bancorp, Intrust Financial Corp. and UMB Financial Corp. as part of a broader negative turn in its outlook of the banking sector.

While it deemed the nation’s banking system healthy in general, Moody’s said pressure on banks is likely to continue as the Federal Reserve signals that it plans additional interest rate hikes in hopes of tamping down inflation.

Zions, according to the ratings agency, had “modestly high reliance” on uninsured deposits that were sensitive to fluctuations in market confidence as well as relatively high levels of unrealized losses in its portfolio of investments.

In a letter sent Monday, Zions Bank President and CEO Scott Anderson sought to reassure customers, saying that Zions remained in solid financial condition, with “access to tens of billions of dollars of readily available liquidity.”

“The credit quality of our loan and securities portfolios has been outstanding in recent years,” Anderson wrote, “and our capital remains strong.”

According to Moody’s, weaknesses in Zions’ funding and assets profile are “somewhat offset by its sound asset quality performance, even though we expect some deterioration in credit performance as the economic and credit cycles turn.”

The agency acknowledged that Zions “has no plans to sell its securities portfolio at a loss” and that it had access to other funding sources. But analysts also noted that Zions’ share of deposits above the Federal Deposit Insurance Corp. insurance threshold made it “more sensitive to rapid and large withdrawals from depositors.”

The risks to Zions

If Zions encountered higher-than-expected outflows in deposits, Moody’s warned, the bank could be forced to sell some of its assets, which, in turn, could crystalize currently unrealized losses.

Roughly 51% of Zions’ deposits were not guaranteed by FDIC insurance as of the end of last year, according to a separate analysis, compared to 97% for Silicon Valley Bank and 90% for Signature Bank.

Anderson said in his letter that Silicon Valley Bank and Signature Bank carried “concentrations of large, uninsured deposits from clients in the technology and cryptocurrency industries, respectively.” He said Zions’ 1.4 million accounts, in contrast, “overwhelmingly tend to be smaller in size and operational in nature.”

Funding risks Zions might face are also offset, Moody’s said, with the creation by the Fed and U.S. Treasury Department of a new fund offering loans of up to one year to banks that might run into trouble.

Even with recent government steps to shore up struggling banks and quell the concerns of depositors, the agency said, Zions “could face difficulty in raising fresh equity capital,” potentially exposing it to reduced profits and elevated credit risk while the Fed continues to target inflation by raising rates.

The agency said its review of Zions from here will focus on fluctuations in its deposit amounts this year “as well as the stickiness of its deposits going forward.” The review will also look at how much in securities Zions might sell to address deposit outflows as well as actions by management to address the effects of securities losses on the bank’s earnings and capital.

Headquartered in Salt Lake City, the bank holding company serves customers primarily in Utah, Idaho and Wyoming, with nearly 10,000 full-time-equivalent employees as of the end of 2022. It reported annual net revenue of $3.2 billion in 2022 and total assets of approximately $90 billion.

According to its latest annual report, it operates seven affiliate banks: Zions; California Bank & Trust; Amegy Bank of Texas; National Bank of Arizona; Nevada State Bank; Vectra Bank Colorado; and The Commerce Bank of Washington. The bank holding company reported more than a million customers at the end of last year.