), the UT-based lender, failed to clear the first round of annual
Dodd-Frank Act Stress Test (DFAST) 2014 conducted by the Federal
Reserve. With Tier 1 common ratio of 3.5%, the company missed the
minimum requirement of 5%.
Substantial commercial real estate losses, higher risk-weighted
assets as well as lower pre-tax, pre-provision net revenue were
the cited reasons behind the failure. Nevertheless, the company
will be resubmitting its capital plan.
This is the first time that Zions has participated in the stress
test conducted under DFAST. Except Zions all other 29 banks
Bank of America Corporation
The Goldman Sachs Group, Inc.
) cleared the stress test, which indicate an overall stabilizing
The stress test is primarily conducted to identify the shock
absorbing capacity of financial institutions. The hypothetical
scenarios hence created are more harsh than likely.
The clearance of stress test by a bank signifies its solid
financial health and strengthens the possibility of improved
capital deployment activities on approval. Given these factors,
does Zions' failure ring an alarm bell for its investors?
Zions had to submit its capital plan before it began disposing
certain risky collateralized debt obligation securities (CDOs)
from its portfolio in January and February. The divestiture
reduced the number of nonperforming CDOs by 36%, thereby
improving Zions' balance sheet position.
Therefore, on March 26, when the Fed announces the results for
the second round of the stress test, it is less likely that
Zions' current capital deployment activities will be impacted.
The company, as of now, disburses a regular quarterly payout of 4
cents and has no share buyback program in place.
Moreover, with the resubmission of its capital plan, Zions will
expectedly clear the stress test, given the substantial reduction
of risk portfolio. We believe that there are chances of the
company increasing its capital deployment activities as and when
approved by the Fed.
Zions currently carries a Zacks Rank #3 (Hold).
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