Fed Okays Zions' Capital Plan - Analyst Blog
March 15 2012 - 12:46PM
Zacks
Earlier this week, the Federal Reserve notified Zions
Bancorporation (ZION) that it has approved the
company’s capital plan, which was submitted in regard to the Fed's
2012 Capital Plan and Review (CapPR). This will help the company
repay its Troubled Asset Relief Program (TARP) dues soon.
Moreover, Zions will not be required to raise additional capital
for this.
TARP Repayment
Zions will entirely redeem its TARP preferred equity in 2012.
This redemption is expected to transpire in two installments of
$700 million each. The first installment will be paid after
receiving the approval of the U.S Treasury. The company is expected
to apply for this approval as early as next week.
However, the payment of the second installment is subject to
certain conditions. These conditions require the parent company to
have sufficient liquidity and no significant weakening in the
company's overall condition. Additionally, Zions’ subsidiary banks
need to return $500 million of capital to the parent company in
2012, after seeking the approval of the primary bank regulator.
The U.S. government had granted a $1.4 billion TARP loan to
Zions in November 2008 in the form of preferred stock warrants to
help it recover from the financial crisis. Over the last three
years, total dividends paid by the company on the TARP preferred
stock sums up to $270.4 million.
However, due to its moderately improving earnings after the
economic crisis, Zions was not getting permission to pay back the
bail-out money. But, during the last earnings conference call, the
company claimed to have ample liquidity to repay the TARP dues
without diluting its shares. This claim was authenticated by the
Fed’s approval.
Additionally, Zions also announced the issuance of $600 million
of senior debt, redemption of Temporary Liquidity Guarantee Program
(TLGP) debt of $255 million on its maturity in June and unchanged
quarterly dividend of 1 cent per share throughout 2012.
J.P. Morgan Securities LLC, a division of JPMorgan Chase
& Co. (JPM) acted as the financial advisor to Zions in
submitting its capital plan.
Story Behind CapPR
Comprehensive Capital Analysis and Review (CCAR) is an
assessment of the company’s financial position, which is undertaken
by the Fed to avoid the reoccurrence of financial crisis as
encountered in 2008. The Fed wants to ensure that the 19
participating banks have enough capital to survive economic and
financial downturn.
Additionally, as per the CapPR framework, banks with assets of
$50 billion or more, that were not included in the CCAR, were also
included in the stress test. These banks were put through bleakest
economic scenario to review their financial ability to confront
another recession. The hypothetical scenario presumed more than 13%
rise in unemployment rate, more than 50% plunge in the Dow Jones
Industrial Average and more than 21% fall in home prices.
Based on examination of several economic metrics, the Fed tested
the preparedness of these 11 additional banks.Further, the Fed
required the participating banks’ Tier 1 common equity to remain
above 5% to get approval for their capital plans. Using those
hypothetical conditions, Zions projected its Tier 1 common equity
ratio to be about 7.9%.
Impacts of the Stress Test
Meeting the stress test criteria signifies that Zions is well
positioned in terms of capital and can outlive another economic
downturn. Also, it is a relief for the shareholders that the
company will not be required to issue new equity for the repayment
of TARP.
In addition, after settling the TARP obligation, Zions will look
forward to deploy its capital through dividend hike and share
repurchase, which will further enhance investors’ confidence on the
stock.
Zions currently retains a Zacks #3 rank, which translates into a
short-term Hold rating.
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ZIONS BANCORP (ZION): Free Stock Analysis Report
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