Following the U.K.'s vote last month to leave the European Union, analysts and investors expect a more active M&A environment in financial services, especially among regional banks like the Salt Lake City-based lender.
Some of the action predated Brexit, as two bank-specialist activist funds, Basswood Capital and Clover Partners LP, have accumulated stakes in Zions over the past few months, 0.45% and 0.1%, respectively. Though it's unlikely that either will launch a proxy contest to push for a deal any time soon, Clover Partners Johnny Guerry contends that a deal is likely in Zions future, since the uncertainty has diminished prospects for Federal Reserve rate hikes.
"For many banks, the panacea that was supposed to be higher interest rates is being put off for some time, and as a result, we're going to see substantive increase in M&A activity," Guerry said in an interview. "If Zions' board chose to engage potential acquirers, I believe there would be a number of suitors with a strong appetite for acquiring it."
A key issue for Zions is its regulatory costs. It has more than 450 branches in the West and Southwest U.S. and is on the smaller end of institutions with $50 billion or more in assets that were designated by regulators as a Systemically Important Financial Institution and hit with tougher capital, leverage and liquidity requirements.
A combination with a larger bank would allow Zions and its acquirer to leverage their combined size to help offset some of those costs and obligations, which include Federal Reserve stress tests and living wills to explain how they would dismantle themselves in bankruptcy without causing collateral damage to the markets.
A legislative effort to hike the minimum threshold -- in a bid to provide relief to Zions and a few other smaller regionals -- collapsed in December and isn't likely to be revived soon.
Zions, which has some exposure to energy prices through loans to oil and gas companies, also barely passed this year's Fed stress tests, which measure whether banks have enough capital to survive a 2008-style crisis.
A perennially poor performer, Zions attained an 8.9% total capital ratio, just up from an 8% minimum. Nevertheless, the bank was approved for a 30% increase in its dividend and a $180 million share buyback.
A number of analyst firms contend that 2017 could be the first year to see a combination of systemically important banks. While Zions may be one candidate, Comerica (CMA) - Get Report is potentially another, as it came under intense public pressure from investors at its April annual meeting to improve itself or sell and has hired Boston Consulting Group to conduct a review of costs and business opportunities.
RBC Capital Markets issued a note Thursday suggesting that the post-Brexit interest-rate environment could accelerate SIFI-to-SIFI deals that the firm anticipates would start in 2017.
The note also considered negative interest rates, once unthinkable, as a real possibility that would "force banks to be more aggressive [with] strategies on mergers and acquisitions." Such an environment, RBC notes, could also lead to a reduction in the number of branches and cuts to the size of banks' balance sheets.
Regulators in Washington won't permit the largest so-called universal or too-big-to-fail banks, such as JPMorgan Chase (JPM) - Get Report , to buy depository institutions, but the central bank may very well approve mergers among regional midsize banks.
Some healthy midsize U.S. institutions as well as the top Canadian banks and some Asian ones might be interested in buying Zions, notes Clover's Guerry. On the U.S. side, Guerry suggests that BB&T Corp. (BBT) - Get Report and U.S. Bancorp (USB) - Get Report are both "real candidates" as potential buyers for Zions or Comerica.
Canadian banks have shown a propensity for deals and made some of the largest acquisitions of U.S. banks in recent months, with Toronto-based CIBC's (CM) - Get Report $3.8 billion purchase of wealth manager PrivateBancorp Inc. (PVTB) last week and Royal Bank of Canada's (RY) - Get Report acquisition of Los Angeles-based City National Corp. with $2.6 billion in cash and 41.6 million RBC shares in November.
"There would likely be a lot of foreign interest," Guerry said. "The regulatory costs look like they will remain for the foreseeable future, and they continue to be a concern, especially when you aren't going to get any interest-rate relief in the not-too-distant future."