Zions Bancorporation (ZION), the Utah-based lender, in a regulatory filing revised the impact of the Volcker Rule on its earnings following a relaxation in the rule recently. After meeting the present regulatory requirements, the company expects to report a net loss between 31 cents to 33 cents per share in fourth-quarter 2013.
Following their concerns over the negative impact of the rule, analysts have been revising 2013 estimates downward over the last 30 days.
Previously, as per the Volcker Rule, most of Zions’ bank and insurance trust preferred collateralized debt obligation (CDO) securities and other asset-backed CDO securities came under the category of restricted investment and had to be divested.
As Zions holds a huge proportion of CDOs among all U.S. banks, any divesture would have largely disoriented the market thereby causing losses to other small community banks.
The Volcker Rule was faced with widespread criticism and was challenged by the American Bankers Association (ABA) in the U.S. Court of Appeals. Moreover, major Wall Street banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and The Goldman Sachs Group, Inc. (GS) was expected to follow the suit.
Consequently, clauses of the Rule were somewhat relaxed. As per the interim final rule, a major portion of Zions’ trust preferred securities CDOs could be retained. The regulatory authority further clarified that the aforementioned CDOs were exempted as they were invested in “qualifying TruPS collateral.”
Nevertheless, the remaining CDOs will be disposed by Zions and will entail a one-time pre-tax cost ranging from $135 million to $145 million, down from the earlier projection of $387 million. Moreover, the company has to bear an additional $80 million charge for successful tender and retirement of subordinated debt in the fourth quarter.
Further, Zions’ tangible common equity per share is expected to improve following the divesture of the CDOs as these securities carry higher regulatory risk weighting. Therefore, it is likely that Zions will resubmit its 2014 capital plan to the Federal Reserve to present the revised impact of the Volcker Rule on its financials.
Zions will release fourth-quarter earnings on Jan 27, 2014 after the market closes.
Currently, Zions carries a Zacks Rank #3 (Hold).
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