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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