Zions Loan Loss Sent the Market Spiraling. Why This Analyst Just Upgraded the Stock.

Baird upgrades Zions Bancorp stock to Outperform from Neutral amid selloff. (Kim Raff/Bloomberg)

Key Points

• Baird upgrades Zions Bancorp to Outperform with a $65 price target, viewing a 13% stock drop in the stock as ‘overdone.’
• Zions Bancorp incurred a $50 million charge-off in the third quarter due to legal actions against two borrowers.
• The $50 million loss is considered unique to specific borrowers, not indicative of systemic credit risk.

The same week Zions Bancorp unleashed fears about widespread credit risks in the American economy—and caused the S&P 500 to drop—one Wall Street firm upgraded the regional bank’s stock.

Analysts at Baird boosted Zions to Outperform from Neutral and maintained a $65 price target on shares of the regional lender in a research note Friday. The upgrade came after Zions took a $50 million charge-off in its third quarter due to legal actions against parties affiliated with two of its borrowers. The stock sank 13% to $46.93 on Thursday following the disclosure.

That selloff was “overdone,” Baird said, arguing that the credit risk is likely limited to these particular loans. Zions generally has maintained “disciplined” underwriting growth in recent years, and the $50 million loss pales in comparison to Thursday’s roughly $1 billion drop in market capitalization, the firm noted.

“We feel like the panic selling provides a great opportunity to buy ZION shares here,” Baird analyst David A. George wrote. “The fraud-related nature of this announcement leads us to believe this is a unique borrower rather than anything systemic.”

Zions stock rose 4.3% to $48.95 in premarket trading Friday.

Analysts at Raymond James concurred that the credit risk seemed contained, reiterating a Market Perform rating for the stock in the leadup to Thursday’s selloff.

“We ultimately view this to be a one-off credit hiccup for the bank, not a systemic credit issue,” wrote analyst David J. Long.

Still, the firm pushed back on the idea that Zions has been particularly conservative with its loan growth. A consistent increase in at-risk and past-due loan balances has been a sticking point for investors in recent years, Long wrote.

Zions is scheduled to report third-quarter earnings after the market closes on Monday.

Write to Nate Wolf at nate.wolf@barrons.com