Zions braces for loan charge-offs in industries hard hit by pandemic

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Zions Bancorp. in Salt Lake City is anticipating charge-offs will rise through the end of the year driven by weaknesses in industries hit hard by the coronavirus pandemic.

The $75 billion-asset company said that the volume of problem loans spiked in the second quarter and that about $4.2 billion of commercial loans, or 8.6% of its loan portfolio, are at risk of default. More than $1 billion of the problem credits are commercial real estate loans made to retailers and roughly $640 million are loans to the struggling hotel sector. Many borrowers in the technology, telecommunications and transportation sectors are also struggling to keep pace with payments, executives said.

“We expect adverse credit migration, we expect charge-offs,” Chief Financial Officer Paul Burdiss said in an earnings call with analysts late Monday.

Since they began reporting earnings last week, many banks have warned of more charge-offs to come and highlighted high levels of stress in sectors most affected by lockdowns and stay-at-home orders.

Western Alliance Bancorp in Phoenix, for example, said that more than 90% of its loans to the hotel industry are in some form of deferral. Other lenders, including Regions Financial in Birmingham, Ala., and Hancock Whitney in Gulfport, Miss., pointed to energy lending as a particular area of weakness, as demand for oil and gas has plummeted during the pandemic.

The $144 billion-asset Regions reported $85.8 million in gross losses on its energy book in the second quarter, more than it lost on that portfolio in 2018 and 2019 combined. The $31.7 billion-asset Hancock Whitney, meanwhile, recently sold nearly $500 million of energy loans as part of a broader effort to de-risk its portfolio.

When asked whether Zions would follow suit and consider selling off some of its energy portfolio, executives quickly ruled it out, stressing differences between the two institutions.

“We're not thinking about selling off a portion of our portfolio to reduce the risk,” said President and Chief Operating Officer Scott MacLean. Hancock Whitney’s “exposures were pretty different than ours and they had a more regionalized portfolio as well.”

On a positive note, Zions said it has captured scores of new customers through its participation in the government’s Paycheck Protection Program. Executives estimated that a little over 20% of the total PPP applications Zions processed came from brand-new customers, translating into roughly 10,000 new small-business clients.

In total, Zions made $6.9 billion in PPP loans. That broke down into almost 47,000 loans, three-quarters of which were for less than $100,000. The average loan size for new customers was $91,000.
PPP also contributed “meaningfully” to deposit growth of 21% to $65.7 billion, the company said.

Zions’ net earnings totaled $57 million in the second quarter, compared with $189 million in the second quarter of 2019. Its provision for credit losses was $168 million, compared with $258 million in the prior quarter and $21 million a year earlier. Total loans grew 13% or $6.5 billion to $55.1 billion, largely due to PPP.

Net revenue before provision for loan losses declined 10% to $256 million. Net interest income ticked down 1% to $563 million, and the net interest margin contracted 31 basis points to 3.23%.

Noninterest income declined 11% to $117 million. While mortgage activity drove loan-related fees higher, that was more than offset by lower capital markets, card and retail and business banking fees.

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Earnings Commercial lending Paycheck Protection Program Credit quality Zions Bancorp.