3rd UPDATE: Zions Up On Exchange Offer, Tax Valuation Plan
November 23 2009 - 2:29PM
Dow Jones News
Zions Bancorp Inc. (ZION) announced plans to swap about $140
million of preferred shares for up to 7 million common shares as
the company looks to boost its common-equity levels.
The company also said in a filing with the Securities and
Exchange Commission it has executed transactions involving Fed
funds futures that effectively make its balance sheet more "asset
sensitive," a move Raymond James analyst Dennis Klaeser said would
provide the company with a significant tax benefit and reduce the
size of its deferred tax assets.
It will result in Zions being able to recoup taxes paid in 2007,
he said.
Before Monday, the stock had been underperforming relative to
its peers, and had been in a rather steep selloff since it reported
earnings in October, Soleil-Tenner Investment Research analyst Gary
Tenner said.
The stock was recently up 16% to $14.59. It's off 40% so far
this year and 20% in the last three months.
Klaeser said the recent underperformance was related to concerns
about exposure to commercial real estate and construction lending,
as well as worries that its capital ratios were light.
James Abbott, Zions director of investor relations, said the
company's capital ratios aren't light relative to regulatory
capital guidelines, adding Zions has a 10% Tier 1 capital ratio,
compared with the regulatory "well-capitalized" level of 6%. There
is chatter in the industry that the regulatory ratio may go up, but
"even the most onerous chatter that you hear in the marketplace
puts it in the high single digits," he said.
Abbott added the company isn't light on capital compared with
what regulators want, but is light compared with some other
regional bank peers. "However, we feel that's extremely justifiable
because our pretax, pre-credit earnings number is one of the best
in the industry," he said.
Sterne, Agee & Leach analyst Edward Timmons said there has
been a lot of speculation that Zions was going to have to write
down some of its deferred tax assets, which led to a lot of the
stock weakness. Based on pre-provision cash flow and excluding
goodwill impairment, he said he doesn't think it will have to
impair the deferred tax assets in the current quarter.
Meanwhile, the exchange offer, while a nearly 50% discount to
face value, is close to a 25% premium to where the preferred shares
were trading Friday. Zions has about 114 million shares
outstanding.
Several analysts pointed out that the amount the exchange offer
can raise depends on the number of shares tendered, and Tenner
added that it is hard to say what that will be.
Dennis said the exchange offer will "incrementally bolster
(tangible common equity)," but won't necessarily increase
regulatory capital, since it's just changing out one form of Tier 1
capital for another.
He and Timmons said they thought there was still more capital to
be raised.
Timmons said that, depending on its collateralized debt
obligation portfolio and how long the current credit cycle lasts,
there is talk that Zions could need to raise about $500
million.
The Utah-based bank has been hurt by the woes in the real estate
market in the West, helping the company report losses for four
consecutive quarters. But Zions last month said it saw some signs
of stabilization and more moderate increases in credit costs.
Zions also got an upgrade, to buy from hold, earlier Monday from
Soleil's Tenner, before it announced the exchange offering. He said
in a note to clients that the recent pullback in the stock is an
"attractive entry point."
Several other regional banks were also trading higher Monday,
including Regions Financial Corp. (RF), Marshall & Ilsley Corp.
(MI) and SunTrust Banks Inc. (STI), which were up 5.8% to $5.76,
$3.9% to $5.57 and 5.4% to $23.22, respectively. Oppenheimer
analyst Terry McEvoy said M&I is a bank that generally trades
in line with Zions, though he added that the news from Zions seemed
to be very company specific.
Over the last week or so, he said, the market has seen some
rotation back into regional banks that haven't been seen as being
at the top end of the sector--places that have had losses and the
need to raise more capital, as well as a lower credit profile.
Monday's move seems to be some follow-through on that trend, he
said.
-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353;
kerry.benn@dowjones.com
(Kevin Kingsbury contributed to this article.)
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