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.

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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.

With the company projecting a Tier 1 common equity ratio of 7.9% following the completion of its TARP repayment, Miller says that "Zions does satisfy the Fed's capital requirements (per Basel III)," but that it "remains to be seen how the Fed will respond to this plan," since "most banks with a similar or larger amount of assets had to raise some common equity when paying off TARP."

Over the long haul, Miller likes the company's prospects, since the company has significant operations in Utah, California and Texas, which "are showing strong commercial loan demand and substantial credit improvement," and "these markets are projected to have decent population growth over the next several years, which should lead to above-average loan demand for Zions as a whole."

In conclusion, Miller says that "combined with the bank's relatively asset-sensitive profile, Zions is setting up well to outperform regional peers, especially if we see a pickup in economic activity."

Sterne Agee analyst Todd Hagerman has a different opinion on Zions, with an "Underperform" rating and a $13 price target, saying on Monday that despite the company's "optimistic prognosis" on Investor Day, "internal capital formation remains weak (3-4% ROE projected in 2012), and the company is still facing myriad operating challenges and core profitability improvement will be limited, at best."

Hagerman estimates that Zions will earn $1.40 a share in 2012, followed by EPS of $1.70 in 2013.

The analyst is "cautious on the shares heading into the March capital review following the Federal Reserve stress tests and potential for a larger than expected capital increase" to repay TARP.

Hagerman's price target for Zions Bancorp. "incorporates roughly a $600mm common equity raise in 2Q12."

Zions Bancorp.'s shares pulled back 2% on Friday, to close at $19.50.

Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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