Zions Get Hit By Volcker Rule With $630M CDO Charge

By Mani
Updated on

Zions Bancorporation (NASDAQ:ZION) announced that the Volcker Rule will force it to take a hit on its portfolio of Collateralized Debt Obligation, showing it is not just big banks who will be impacted by the recent Rule.

Todd L. Hagerman and Robert Greene of Sterne Agee point out the likely capital impact for the Salt Lake City company is likely years away from final determination.

Zion to record $629 million non-cash charge

According to Sterne Agee analysts the Volcker Rule will force the company to reclassify the entirety of its predominantly bank and insurance Trust-Preferred Collateralized Debt Obligation (CDO) portfolio as ‘Available for Sale’ and Zions Bancorporation (NASDAQ:ZION) will record a $629 million pre-tax non-cash charge to 4Q13 earnings. This would translate into post-tax charge of $387 million.

Zions Bancorporation (NASDAQ:ZION) disclosed Monday that much of its trust preferred collateralized debt obligation portfolio will be considered disallowed investments under the final rule implementing Section 619 of the Dodd-Frank Act. The Volcker Rule was released last week.

Zions Bancorporation (NASDAQ:ZION) disclosed that consequent to the Volcker Rule, it will reclassify all covered CDO’s currently classified as ‘Held to Maturity’ into ‘Available for Sale’. This would force Zion to register an estimated $629 million non-cash charge, via an other-than-temporary impairment non-cash charge to earnings.

According to the Sterne Agee analysts, though the announcement estimate is somewhat preliminary, the charge would imply about $2.11 per share impact to its 4Q13 EPS as against the analysts’ current $0.44 per share operating EPS estimate.

The analysts also point out that the charge is estimated to reduce Zions Bancorporation (NASDAQ:ZION)’s Tier 1 common ratio by about 73 bps with pro-forma 3Q13 tangible book value falling $0.16 per share to $23 per share. Interestingly, the average amortized cost of the $2.350 billion (par value) portfolio would fall to about $1.120 billion, denoting about 51% of par value.

No immediate material dispositions of the securities

Zions Bancorporation (NASDAQ:ZION) has disclosed in its statement that it doesn’t anticipate immediate material dispositions of these securities and is evaluating multiple ways to comply with the Volcker Rule requirements in a manner that optimizes shareholder value.

Sterne Agee analysts point out that the final Volcker Rule requires banking entities to divest assets by July 21st, 2015, with the option to apply for 1-year extension through July 21st 2017. The analysts believe given the improvement in the underlying portfolio, incremental valuation improvements and that the 5-year deferral window for 70 to 80% of the underlying collateral closes between 4Q13 to 1H15, they anticipate Zions Bancorporation (NASDAQ:ZION)’s liquidation process will likely play out over a period of time.

Todd L. Hagerman and Robert Greene of Sterne Agee believe certain non-banks, particularly hedge funds and private equity funds would bid on the assets, thereby potentially reducing exposure sooner rather than later. However, the analysts believe the probability of this happening is relatively low, given Zion’s track record of trying to maximize shareholder value during times of uncertainty.

Sterne Agee analysts have assigned a Neutral rating on Zions Bancorporation (NASDAQ:ZION) and pegged the price target at $30.

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