), which is one of the premier financial services companies in
the U.S., is recently faced with the pressure of the revised
Volcker Rule released last week. As per the rule, most of Zions'
bank and insurance trust preferred collateralized debt obligation
(CDO) securities and other asset-backed CDO securities come under
the category of restricted investment and thus cannot be held
until they mature.
Zions has to divest these disallowed investments by Jul 21,
2013. The deadline would be extended to Jul 21, 2017 if the bank
fails to meet it.
Though Zions does not plan any immediate material divesture,
it intends to convert the CDOs from "Held to Maturity" into
"Available for Sale" during the fourth quarter 2013. This will
entail a one-time after tax cost of $387 million.
Zions has a significant portfolio of CDO securities. In the
recent past, with the overall improvement in the market, the
trading prices of these securities were increasing and going
forward could have driven the company's growth. The recent
development, therefore, is a setback for Zions, wherein it has to
bear one-time non-cash charges as well as damages to its capital
Notably, Zions' common equity Tier 1 ratio under Basel I rules
will decline by 73 bps from the reported figure as of Sep 30,
2013. Tangible common equity ratio will fall 6 bps to 7.84%.
The intraday price movement reflected depreciation in the
stock price after the news release. However, the company's shares
later gathered momentum and closed at $28.56. This marked slight
improvement from prior day closing figure of $28.47.
The initial market reaction was mixed and indicates nothing
conclusive. However, we may expect the Zions' share price to
tread downwards as the Volcker Rule will likely drag its
The financial crisis of 2008 saw the collapse of large banks,
bankruptcy and economic turmoil. To prevent such an occurrence in
the future, regulatory authorities have started to closely
monitor various financial organizations and their activities.
Though Volcker Rule will hurt earnings as well as shareholder
returns in the short term, from a broad perspective, it will
enhance investors' security and drive the economy toward
Currently, Zions carries a Zacks Rank #3 (Hold). Better-ranked
West banks include
BofI Holding, Inc.
). All these stocks have a Zacks Rank #1 (Strong Buy).
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