Zions Permitted To Hold CDOs After Volcker Rule Change

Sterne Agee analysts Todd L. Hagerman and Robert Greene rate Zions Bancorporation have a new report on Zions Bank, which gets into the latest changes to the Volcker Rule and CDOs.

After the close, Zions Bancorporation (NASDAQ:ZION) announced the updated 4Q13 impact of the Volcker Rule. Consequently, ZION has lowered the expected pretax charge on its CDO portfolio to $135-$145mm versus $629mm previously. The revised charge largely ties to discretionary asset sales in the quarter. ZION pre-announced 4Q13 EPS at a loss of $0.31-$0.33. Adjusted for the expected charges, this implies GAAP EPS of $0.45- $0.47 in 4Q13, or ahead of consensus estimates about $0.43.

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ZION releases updated Volcker Rule Impact

In light of the issuance of the interim final rule published on January 14, a substantial majority of Zions Bancorporation (NASDAQ:ZION)’s trust preferred securities (TruPS) collateralized debt obligations (CDOs) will remain permissible holdings under the interim final rule adopted under section 619 of the Dodd-Frank Act (the “Volcker Rule”). The company previously indicated that it would have been required to reclassify all covered CDOs currently classified as “Held to Maturity” (HTM) into “Available for Sale,” resulting in an estimated $629mm (pretax, or $387mm after tax) charge via a non-cash charge through otherthan- temporary impairment. The company now expects to take a $135-$145mm (pretax) charge in 4Q13, related primarily to the company’s decision to sell a portion of its CDO portfolio during the quarter. However, Zions Bancorporation (NASDAQ:ZION) will also record a modest accounting charge related to certain CDO securities not covered by the interim final rule.

Preliminary 4Q13 guidance above Sterne Agee estimates

Zions Bancorporation (NASDAQ:ZION) also announced that it expected to report (after the close on January 27) a net loss of $0.31- $0.33/share, owing to the $135-145mm (pretax) CDO impairment charge and an additional $80mm (pretax) expense related to a sub-debt tender in the quarter. The $215-$225mm (pretax) charge amounts to roughly $0.78/share (after tax), which would imply 4Q13 GAAP of about $0.46, higher than the Sterne Agee estimate of $0.40 and consensus of $0.43.

Ultimately, a positive for ZION

Given the narrowing of the potential CDO charge, early indications of better-than-expected 4Q13 earnings, and modest accretion to tangible book value (owing to an improved unrealized loss position on the CDO portfolio in the quarter), we view this afternoon’s announcement as a modest positive for Zions Bancorporation (NASDAQ:ZION) shares.