Income-seeking investors looking ahead to a post-COVID-19 world may find potential in safe bank stocks that struggled during 2020 at the height of the pandemic. As global vaccinations slowly roll out, still-depressed bank stocks offer attractive yields with the bonus of eventual share price growth.
Operating in 11 western states, Zions Bancorporation (ZION -0.35%) provides a nice example of this potential. The company is one of the largest regional banks in the U.S., with a market capitalization of $8 billion and a total asset base of $81 billion. The bank issued its fourth-quarter 2020 earnings on Tuesday after markets closed, and results clearly indicate that its financial outlook is stabilizing. Below, let's briefly review key points from the report and discuss why Zions Bancorp is an enticing candidate for dividend investors.
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Higher earnings and income opportunity
Zions reported net income of $275 million, against $174 million in the prior-year quarter. The biggest driver of this improvement was a reduction in the company's provision for credit losses. In the first three quarters of 2020, Zions aggressively increased its provision for credit losses by $481 million in anticipation of loan defaults in troubled areas including retail, commercial real estate, and the hospitality industry. But given its success in assisting both new and existing loan customers through the Small Business Administration's Paycheck Protection Program and the overall quality credit across its loan portfolio, Zions was able to fine-tune and reduce its provision by $67 million this quarter, thus boosting net income.
In the company's earnings conference call, CEO Harris Simmons signaled that the bank's biggest risk for loan defaults from the pandemic may already be in the rearview mirror, saying, "While we continue to expect that credit losses will remain elevated relative to our long-term trend level and there's continued uncertainty with respect to the ultimate impact to borrowers from the pandemic, we have been very encouraged by the resiliency of a great many of our customers."
As for operating earnings, net interest margin (the spread between the bank's interest income and the interest it pays to depositors) declined by 11 basis points from the sequential third quarter, to 2.95%. Management attributed the decrease in part to a higher proportion of lower-yielding money market investments relative to the bank's total interest-earning assets. Total net interest income declined by 5% year over year, to $550 million.
Non-interest income improved by 9% over the fourth quarter of 2019 to $166 million. The advance was influenced by higher mortgage fees as interest rates remained low, as well as growing business through the company's new digital mortgage fulfillment interface, Zip Mortgage.
In another sign of stabilization, net loans and leases rose 10% over the fourth quarter of 2019 to $53.5 billion, and deposits jumped by 22% to $69.7 billion. The deposits surge is part of a larger trend in the economy: Individuals have increased their savings and maintained a bias toward liquidity during the pandemic.
A favorable scenario for income investors
Given the banking industry's challenges in 2020, banking stocks remained under pressure through most of last year -- Zions Bancorp stock slipped 16% during the last 12 months. As a consequence, the company's dividend yield has increased to a hefty 2.8%. Zions has ample capacity to service this dividend given a payout ratio of just 36%.
Throughout 2020, Zions maintained its quarterly payout of $0.34 per share. It's notable that the company didn't suspend its dividend, and as economic activity rebounds, shareholders should expect to see the dividend rise. Between 2016 and 2019, the bank more than quadrupled its quarterly dividend, from $0.08 to the current $0.34.
Moreover, the company is reasonably priced at the moment, trading at just 14 times forward one-year earnings, and at a price-to-book value of just 1.1. Thus, investors in this prominent regional bank have the opportunity to enjoy a potentially handsome total return between the rich yield, future dividend hikes, and an eventual price rebound as the U.S. economy normalizes. Following the earnings report, Zions' stock traded down a modest 2% on Wednesday, creating a slight additional incentive for yield-seeking investors to purchase shares.
