Big Bailout Bounce for Zions: FBR (Update 3)
Updated with today's price decline for Zions Bancorp. and comments from Sterne Agee analyst Todd Hagerman, who has an opposing viewpoint on the stock.
NEW YORK ( TheStreet) -- Zions Bancorporation (ZION) is expected soon to announce a plan to repay government bailout funds, which could set the stage for significant earnings improvement and gravy for investors.
Saying that the coming repayment of $1.4 billion in federal bailout funds would be a "catalyst" for the shares, FBR analyst Paul Miller on Monday reiterated his "outperform" rating on Zions, and raised his price target for the shares to $22 from $20.
During the Salt Lake City lender's Investor Day on Thursday, the company's management made a strong case for the franchise's continued viability, improved loan quality and credit administration, capital strength, and efforts to mitigate the pressure on its net interest margin from continued low rates and weak loan demand. Investors responded, sending the shares up over 8% last week, to close Friday at $19.86.
|Zions Bancorporation CEO Harris Simmons|
In the company's Investor Day presentation, Zions addressed discussed its collateralized debt obligation investments, which had a par value of $2.6 billion as of Dec. 30, with an amortized cost of $2.2 billion, but had been written down to an impaired carrying value of just $1.2 billion, because many of the issuers of the trust-preferred CDOs were troubled banks that were deferring interest payments.
With the CDO portfolio already discounted by 43% to cost and 53% to par, Zions sees "more upside potential vs. downside risk" for the portfolio. Miller on the other hand says that over the next year or two, "a significant amount of banks deferring payments will need to make a decision whether to bring the dividends back into repaying status, sell, or declare bankruptcy," and that he does "not believe it will be a positive outcome when it is all said and done."
Then again, according to Miller, a negative outcome for the CDOs "is priced into the stock already." The shares traded for just over their Dec. 30 tangible book value of $19.13 as of Friday's close, and for 14 times the consensus 2012 EPS estimate of $1.45, among analysts polled by Thomson Reuters.
The shares were up 22% year-to-date, through Friday's close.
Miller says that Zions "implied" that it had submitted a plan to the Federal Reserve to repay TARP in two stages, while avoiding a common equity raise. The plan "would entail a series of dividends from the subsidiaries and issuing $600M of senior debt," to repay the government $700 million during the first half of 2012, and the remaining TARP money in the second half of the year.