Zions Disposes Risky CDOs

Zacks

In compliance with the final version of the Volcker Rule, Zions Bancorporation (ZION) recently completed the divesture of certain collateralized debt obligation securities (CDOs). While most of these vended CDOs were categorized as restricted investment as per the Interim Final Rule, others were sold for risk management.

The divestiture resulted in impairment charges of $142 million. However, this one-time expense has already been adjusted in its fourth-quarter results, wherein Zions reported its first earnings miss in the past twelve months. Adjusted earnings per share of 42 cents missed the Zacks Consensus Estimate by a penny.

Zions initiated the sale of CDOs in January and has completed the divestiture of 35 CDOs to date. The transaction generated total proceeds of $347 million and is expected to garner pre-tax gains of $65 million first-quarter 2014.

Further, the sales reduced the number of nonperforming CDOs by 36%, thereby improving Zions’ balance sheet position.

The presence of the aforementioned risky CDOs in the company portfolio would have been a major cause of the projected loss in the forthcoming quarters. However, the divestiture will help ease the loss burden. Therefore, Zions will likely re-submit its capital plan to reflect the change.

Moreover, given the improvement in Zions’ capital structure, we expect the company to get an approval from the Federal Reserve to reward its shareholders with a second dividend hike since the financial crisis.

The stringent regulatory requirements definitely weigh on the company’s profitability in the near term. However, these norms are expected to provide a secured and stable investment scenario for investors in the future.

At present, Zions carries a Zacks Rank #3 (hold). However, some better-ranked West banks include Summit State Bank (SSBI), Preferred Bank (PFBC) and Sierra Bancorp (BSRR). All these stocks have a Zacks Rank #1 (Strong Buy).

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