Moody’s downgrades Zions, but the bank insists it will have ‘minimal’ effect

How might it affect its borrowing and lending? Executive notes three other rating agencies left the Utah-based financial institution unchanged.

(Chris Samuels | The Salt Lake Tribune) A Zions Bank branch in Cottonwood Heights, Monday, March 13, 2023. The credit rating agency Moody's has downgraded Zions' parent company, Zions Bancorp.

Moody’s Investors Service has downgraded Zions Bancorp and 10 other regional banks, a further sign that rising interest rates and high-profile bank failures are continuing to drag on the Utah-based financial behemoth.

But James Abbott, Zions’ director of investor relations, downplayed the downgrade. He said Monday that the three other major credit rating agencies, which have left Zions’ rating unchanged, present a more accurate view.

“Fundamentally, we disagree with the Moody’s downgrade,” Abbott said. “I’ve been in touch with the other three, and there’s been no change in the rating or the outlook.”

Lower credit ratings can make it more expensive for a bank to borrow money, but Abbott doesn’t think one agency’s downgrade will have much effect. “It’s very minimal, frankly.”

Still, investors remained wary. Zions’ stock was trading at $30.89 at 10 a.m. Friday but had fallen to $28.27 by the end of trading Monday, an 8.5% drop. The stock had closed at $41.36 on March 9, the day before Silicon Valley Bank collapsed and triggered a broad slide in regional bank stocks.

“The downgrade of Zions’ ratings reflect the deterioration in the bank’s capital as measured by Moody’s and increased reliance on market funding, limiting the bank’s financial flexibility in an increasingly challenging banking environment,” Moody’s stated in its rationale for the downgrade.

For Zions and other banks, the recent burst of inflation, coupled with the Federal Reserve’s aggressive response by upping interest rates to address the rising prices, is a double-edged sword. In addition to making it more costly to borrow funds, inflation also lowered the value of bonds that the banks bought when interest rates were lower. Those become “unrealized losses” on the banks’ balance sheets, and credit agencies have grown increasingly concerned about them.

Moody’s did note some positives in its report about Zions, but Abbott said those positives were not reflected in the ratings. He noted that Zions had more than $50 million in loans out in the latest quarter, but it had no charge-offs for bad loans in the period. In the past year, he said, Zions’ rate of charge-offs has been 0.06%, compared with an industry average of about 0.45%.

Abbott said Moody’s is giving a qualitative assessment that doesn’t line up with the bank’s quantitative measures. “Zions has one of the best credit-loss performances over the last decade, yet Moody’s rates Zions as an average performer.”

He said the other rating agencies — Standard & Poor’s, Fitch and Kroll — offer a more objective assessment.

Moody’s lowered Zions’ stand-alone Baseline Credit Assessment (BCA) to “baa1″ from “a3.” BCA is defined as the intrinsic strength of the bank without any outside support. Four other ratings for Zions were also lowered, but two others were held steady after a review of the bank. Moody’s had announced the credit review for Zions and other banks shortly after Silicon Valley imploded March 10.

“Moody’s expects the bank to be more reliant on short-term and higher cost wholesale funding to avoid crystalizing securities losses,” Moody’s said in its credit report. “This could, in turn, negatively impact profitability, capital retention and curb financial flexibility in an increasingly challenging banking environment.”

Abbott said Zions is well funded and doesn’t need to sell any securities to meet its obligations.

He said Zions’ deposits, unlike those of Silicon Valley, are weighted more toward business checking accounts, where deposit levels are more predictable.

Silicon Valley’s deposits were skewed by venture capital and technology firms that held large amounts in accounts as they looked for investment opportunities. It was easy for those investors to flee at the first sign of trouble.

Last week, Zions reported first-quarter net earnings of $198 million or $1.33 per share, 18 cents below a Wall Street consensus prediction of $1.54 per share. Deposits were down 16.2% for the quarter as depositors continued to seek higher returns in an inflationary market. Executives said that deposit trends have stabilized since then.

Zions Bancorp includes Zions Bank and seven affiliate banks: California Bank & Trust; Amegy Bank of Texas; National Bank of Arizona; Nevada State Bank; Vectra Bank Colorado; The Commerce Bank of Oregon; and The Commerce Bank of Washington. It employs approximately 10,000 full-time-equivalent workers, and, at the end of 2022, it reported an annual net income of $3.2 billion and total assets of about $90 billion.