Zions, Citi: Stress Test Winner & Loser

Updated to include a discussion on Citigroup's stress test failure, and with closing prices and updated returns.

NEW YORK ( TheStreet) -- Zions ( ZION) was the big winner among the largest U.S. banking names on Wednesday, with shares rising 10.5% to close at $21.58.

Investors cheered the Salt Lake City lender's announcement that t had received the Federal Reserve's permission to repay federal bailout funds received through the Troubled Assets Relief Program, or TARP, without raising common equity.

JPMorgan Chase ( JPM) started the stress test party Tuesday afternoon, while the market was still open, by announcing an increase of its quarterly dividend to 30 cents from 25 cents, and a $15 billion stock buyback plan. This caused the Federal Reserve to move up its public stress test announcement by two days, to Tuesday, following the market close.

The broad indexes were mixed on Wednesday, while the The KBW Bank Index ( I:BKX) rose over 1% to close at 48.12, following Tuesday's 5% increase heading into the stress test results announcement.

Bank of America ( BAC) was a big winner in the stress tests, even though the company didn't request permission from the Fed to increase its one-cent quarterly dividend or to buy back shares.

The Federal Reserve enhanced its regulatory credibility by basing the stress tests on a particularly harsh economic scenario, included real U.S. GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013." In addition, under the Fed's adverse scenario, "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012."

Investors breathed a sigh of relief, sending Bank of America's shares up over 4% on Wednesday, to close at $8.85, following a 6% increase the previous session, after the company passed the stress tests with flying colors.

In its stress test results announcement, the Federal Reserve estimated that Bank of America's Tier 1 common equity ratio under the adverse economic scenario would be 5.7%, increasing to an estimated 5.9% at the end of 2013.

Some analysts had thought that Bank of America might fail the stress tests with an estimated Tier 1 common ratio below 5% under the economic scenario.

Bank of America's have now risen 59% year-to-date, following a 58% drop during 2011.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

While the Federal Reserve released detailed information on the 19 large, complex bank holding companies subject to the stress tests, it didn't release any details on smaller stress-tested holding companies, including Zions Bancorporation, which had $53.1 billion in total assets as of Dec. 30.

The company's shares have now risen 33% year-to-date.

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Zions Bancorporation's approved capital plan includes the repayment of $1.4 billion in TARP money, with the company not being required to raise common equity.

With the shares trading right at book value at Tuesday's close, according to HighlineFI, the bounce on the non-dilution was already built into the shares, for the profitable bank.

Zions plans to repay TARP in two installments of $700 million, with the first payment to be made next week, subject to Treasury Department approval, and the second payment being made during the second half of 2012, following the "return of $500 million of capital from Zions' subsidiary banks to the Parent in the second half of 2012, which requires primary bank regulator approval."

The company also announced that its one-cent a share quarterly dividend would remain unchanged through 2012.

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

Shares of Citigroup ( C) declined over 3% to close at $35.21, partly reversing the previous session's 6% gain, amid the JPMorgan euphoria.

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The shares have now returned ___% year-to-date, following last year's 44% decline.

While the Federal Reserve estimated that Citigroup's Tier 1 common equity ratio would be 5.9% under the adverse economic scenario, if the company were to carry out its plans for an increased dividend payout and share buybacks, the estimated Tier 1 ratio at the end of 2013 would be 4.9%.

So Citi's capital plan failed the stress tests, and the shares were down 3% in early trading on Wednesday, to $35.42.

Citigroup responded by saying it would "submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations," and also that the "Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan."

Credit Suisse analyst Moshe Orenbuch called the Fed's rejection of Citigroup's capital plan a "surprise," and said "the loss estimates appear high versus to peers and high relative to the company's actual historical loss experience."

KBW analyst David Konrad said that the 1% decline in the Fed's estimated Tier 1 common equity ratio for Citi under the company's submitted capital plan indicates that "Citi may have submitted an aggressive capital deployment plan," and that "as a result, the submission of a revised capital plan could still result in meaningful capital deployment."

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

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

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

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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.