Volcker Rule Weighs on Zions

Zions Bancorp. (ZION), 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 ratios.

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 fourth-quarter earnings.

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 sustainable growth.

Currently, Zions carries a Zacks Rank #3 (Hold). Better-ranked West banks include BofI Holding, Inc. (BOFI), Preferred Bank (PFBC) and Sierra Bancorp (BSRR). All these stocks have a Zacks Rank #1 (Strong Buy).

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