Zions Bank has passed a "stress test" conducted by federal regulators to see if it could survive another shock like the Great Recession and is poised to repay $1.4 billion in federal bailout funds to the U.S. Treasury by the end of 2012 without selling any stock.
The Federal Reserve’s approval of Salt Lake City-based Zions capital reserves on Tuesday was cheered by Wall Street. On Wednesday investors drove the regional banking company’s stock up 10.5 percent, to $21.58 a share. Zions was the top-performing stock on the Standard and Poors 500 index. It also led all publicly traded bank issues.
"The Street was really expecting Zions to have to raise common equity in order to get out" of the Troubled Asset Relief Program, said Brian Klock, a bank analyst with Keefe, Bruyette & Woods in San Francisco.
"The Street expected Zions to have to raise $400 million to $500 million, [which] would have been a potential 15 percent [effect on future earnings]. That’s pretty dilutive."
Within a few weeks, Zions will repay half the TARP funds it received in November 2009, with the balance to be paid before the end of the year, said James Abbott, who runs the bank’s investor relations office.
The stress test was meant to measure the amount of Zions’ core equity capital against its loans, a ratio called the Tier 1 common ratio. The Fed was looking for a ratio of 5 percent; Zions’ ratio was 7.9 percent, suggesting it could survive another severe economic downturn.
By contrast, the median ratio of the 19 biggest U.S. banks was 5.9 percent.
Retail customers of the bank won’t see anything different as a result of the stress test outcome, but shareholders and corporate customers who want to be certain Zions is on healthy footing will be pleased, Abbott said.
"This sends a very strong signal that the company is in a strong financial position, and any concerns about using Zions Bank or one of the other affiliate banks [across the West) should be easily put to rest, considering how severe the stress test was," he said.
The test was meant to see how Zions would manage a horrific economic crisis, including a rise in the unemployment rate to more than 13 percent, a 50 percent decline in the Dow Jones industrial average and a decline in home prices of 20 percent or more.
Shareholders should see improved earnings from Zions because it won’t need to make dividend payments of more than $80 million a year on the TARP funds. Zions can use the savings to buy back expensive preferred stock and eliminate or reduce other debt that eats up another $100 million annually.
"At our investor day [in February], we reviewed a scenario that suggested our earnings could roughly double just by cleaning up or reducing our high-cost capital structure," Abbott said.
Although Zions won’t sell more common stock, it does plan to issue $600 million in senior debt to help repay the TARP funds. Over the long term, that debt may be repaid with profits earned by its eight bank subsidiaries in 10 Western states, including Zions Bank, he said.
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