Citigroup analyst Greg Ketron notes a surprising drop in early stage delinquencies at Zions (ZION) and wonders aloud about the implications for the bank and the broader credit environment. Specifically, he muses that this could be an early sign of a credit-market turnaround.
Ketron first explains why early-stage delinquencies are an important barometer:
early stage delinquencies (30-89 day past dues) are a leading indicator that help in determining the direction of credit deterioration for a company… A bank will first report a loan is contractually past due once it is 30+ days past the contractual payment due date. Although these loans can be cured upon payment and go back to current status, it is the banks’, and subsequently the publics’, first glimpse at the degree borrowers are missing payments and a key early indicator the degree that credit may be deteriorating or improving
That said, Ketron details how results have improved for Zions over the last quarter:
6/30 Call Reports filed by Zions’ bank subsidiaries shows significantly lower 30-89 past due (PD) delinquency rates for all except the NV and CO subs (14% of total loans). Adjusted for $897 mln of loans from Lockhart, we calculate that 30-89 day PDs dropped to 0.77% from 1.31% on 3/31. AZ (11% of loans) surprised the most, dropping from 2.64% in 1Q08 to 1.37% in 2Q08.
Given that the trend is going in the opposite direction for virtually every other bank, these are surprising results for Zions. But Ketron isn’t getting carried away:
Though still early to call for a turn on credit, we believe the sizable drop in early stage delinquencies mitigates credit deterioration in 3Q… While this would potentially add $0.20 to our 3Q08 estimate of $0.82, we are not changing our estimates until we have more visibility in other areas such as mark-to market risk — while upside potentially exists to our estimates, we will await developments during the quarter that will allow us to better assess other risks.
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