Zions predicts decline in net interest income as deposit costs rise

George Frey/Bloomberg

Zions Bancorp. is paying a price for offering more competitive rates on deposits in an effort to stem further outflows.

The Salt Lake City-based bank projected a 7% decline in net interest income in the second quarter, thanks in part to the higher rates it expects to pay out to depositors. The bank also said it expects lower net interest income in the first quarter of 2024 compared with the first quarter of this year.

"The bank is getting more aggressive on the deposit pricing front, which should help to stem further outflows, albeit at the expense of the margin," Wedbush analysts David Chiaverini and Brian Violino wrote in a research note.

Deposit outflows in the first quarter were higher than some analysts had expected. Deposits at the $88.6 billion-asset bank totaled $69.2 billion in the first quarter, down 16% from a year ago. They were down about $2 billion from the final quarter of 2022.

Despite the larger-than-expected outflows, Zions didn't make use of the Federal Reserve's discount window or the Fed's Bank Term Funding Program — the central bank's new facility to provide funds to banks that may not be able to meet the needs of all depositors — in the first quarter. 

Shares of Zions fell more than 5% to $31.08 in midday trading Thursday. Like the share prices of many of its regional bank peers, Zions Bank's stock price has yet to fully recover from the steep decline it suffered during last month's banking crisis.

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Zions Chief Executive Officer Harris Simmons said he isn't sure how the conditions that led to the March crisis will be resolved, but that he hopes Congress and bank regulators will consider any regulatory changes thoughtfully.

"We've got to be careful we don't throw a lot of babies out with the bathwater," Simmons said. "If you go at this with a meat cleaver, you've got some of the largest banks in the country that are going to have to raise tens upon tens upon tens of billion dollars of capital," Simmons said on a call with analysts Wednesday afternoon. 

In the first quarter, Zions reported $198 million in net earnings, up slightly from $195 million a year ago. Revenue totaled $336 million, up 46% from the first quarter of 2022. Expenses of $512 million were up 9% from a year earlier, higher than anticipated.