Zions: Use The Irrational Selloff As An Entry Point

| About: Zions Bancorporation (ZION)

Summary

Zions reported that earnings grew over the prior-year Q4 and beat analyst estimates.

The bank trades at a sizable discount to tangible book value.

The stock provides an opportunity as the market builds in the expectations of large credit losses into the price.

 Zions Bancorporation

For a year now, Zions Bancorporation (NASDAQ:ZION) has provided a proxy for the bank sector related to energy exposure. The regional bank has one of the largest exposures to energy companies while also providing some of the most detailed information about the exposure to the sector.

Due to the fears of spreading contagion related to collapsing oil prices, Zions has plunged from $30 to start December to only $20 now. The stock was even down over 5% for the day prior to the bank beating analyst estimates.

For those that don't recall, Zions was one of the first banks to breakout exposure to the energy sector back when reporting the Q4 '14 earnings report a year ago. At the time, the stock plunged prior to those earnings on energy-related exposure fears as oil plunged to $45 per barrel. Now a year later, the bank actually reported higher earnings in the last quarter, though my warning of a energy-related headwind for the stock has come to fruition.

Not only did Zions beat Q4 estimates, but the bank actually reported sequentially higher earnings and YoY growth. The bank earned $0.43 this quarter versus $0.33 in the prior-year period.

The regional bank made a telling statement in the press release.

Credit quality remained in line with expectations, with deterioration in energy-related loans and continued strength in other loans.

In essence, Zions is seeing continued strength as the non-energy related economy continues to benefit from lower gas prices. While the company increased the net chargeoffs in the energy portfolio, the overall non-performing assets were down 4% to only $357 million.

As the below table highlights, Zions is quickly whittling down the exposure to the energy sector. The total energy-related loans and credit exposures are already down 10% from mid-year 2015 levels.

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Source: Zions Q4 '15 earnings release

The company forecasts energy loan losses of up to $100 million over the next year. The number is very manageable with quarterly profits of over $80 million. Not to mention, the tangible book value sits at over $27.

The bank is in a very sound position to weather the weakness in one sector of the market that benefits the remaining sectors. Zions is seeing minimal weaknesses in overall credit quality so far.

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Source: Zions Q4 '15 presentation

The key takeaway is that the market is already pricing in the energy weakness spreading into a recession that takes down other sectors such as the real estate market in Houston. If anything, Zions is seeing the benefits one would expect from lower oil prices. The majority of the loan portfolio is performing exceptionally.

Investors should not only use Zions as a quarterly proxy for regional banks and the impact of energy loans, but the stock is actually turning very attractive. The market is now predicting massive loan losses that aren't apparent by the financial results of the bank. Use the irrational weakness in the stock and market to buy this regional bank far below tangible book value.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZION over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.