Zions Bancorp may charge off as much as $100 million against fourth-quarter earnings after the regional banking company revalues its portfolio of collateralized debt obligation securities, raising the possibility it could post a loss when financial results are reported in January.
The size of the noncash charge hasn’t been determined because Zions is still assessing how much it should reduce the value of the CDOs it bought from hundreds of small banks that banded together about 10 years ago to raise capital, James Abbott, senior vice president of investor relations, said Friday.
“It would be premature to answer that question because we don’t know what the charge will be. We are running various models with various assumptions. We will bring those to a committee [of the Salt Lake City-based company] for them to choose, and the committee will make a decision about what is the best and most likely outcome,” Abbott said.
It’s hard to see what Wall Street thinks of the revaluation. On Friday, credit ratings firm Fitch Ratings said it may consider revising its outlook on Zions downward to “stable” after raising it to “positive” in November. On the other hand, shares of Zion closed higher Friday, up 1.5 percent, at $19.34.
“If what they are talking about results in a material loss, we may revise the outlook back to stable. But we are not necessarily going to do that. It would have to be a significant net loss to the company,” said Justin Fuller, a director in Fitch’s financial institutions group.
“Other than that, the trends at Zions have been generally positive, which is a reflection of revising our rating to ‘positive’ last month.”
The reassessment of Zions’ CDOs stretches back about a decade, when 800 small banks got together to raise capital at a time when the U.S. economy was growing. Few of the banks were by themselves big enough to issue debt securities, so they joined. Over the next two or three years, Zions purchased close to $2 billion of their trust-preferred CDO securities. Their investment value to Zions was based on the banks’ ability to make interest payments over a fixed period of time. To protect itself, Zions assumed for purposes of setting a value on the securities that not all banks would be able to make regular payments and some might even go out of business.
Enter the 2008 global financial meltdown. Hundreds of banks failed during the crisis, including some whose CDOs were bought by Zions. Other banks suspended their CDO interest payments under a five -year grace period, opting to conserve capital. Although the crisis is largely over, Zions assumes more banks could fail over the next two decades. Others are reaching the end of the deferral period and may not be able to come current on their payments.
Those banks may have to declare bankruptcy or sell themselves to come up with enough cash to satisfy Zions. Abbott said that could stretch out the time it takes Zions to receive payment, reducing the value of the securities.
“It is becoming an issue now when it hadn’t been one in the past. So we are refining the [valuation] model” to make it even more conservative, he said.
It’s possible that few or none of Zions’ latest assumptions will come to pass. In that event, the bank will in time restore whatever it charges off during the quarter, Abbott said.