DBRS Confirms Zions' Ratings after Volcker Rule Impact Announcement; Sr. at BBB (low); Stable trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Zions Bancorporation (Zions or the Company) and its related entities, including Zions’ BBB (low) Issuer & Senior Debt rating. The trend on all ratings remains Stable. The Confirmation follows Zions’ preliminary assessment of the impact of the Volcker Rule, which will result in the Company taking an estimated pro forma (September 30, 2013 financial statements and securities valuations) one-time non-cash charge to earnings of $629 million ($387 million after tax) in 4Q13.

While the after-tax non-cash charge will result in a substantial quarterly loss, DBRS believes that the loss is absorbable and that the Company remains sufficiently capitalized, as much of the loss was already recognized in tangible capital ratios through AOCI. DBRS notes that further deterioration in Zions’ capital, which is measurably beyond expectations, could pressure its ratings.

Under the recently released rules implemented under the Volcker Rule, substantially all of the Company’s bank and insurance trust preferred collateralized debt obligations (CDOs: approximately $1.8 billion amortized cost at September 30, 2013) will be considered prohibited investments. As such, Zions is required to divest these securities by July 21, 2015, or at the latest, with extensions granted by the Federal Reserve, by July 21, 2017. DBRS notes that at September 30, 2013, these securities had $597 million of net unrealized losses recognized in AOCI. Although a large component of the underlying banks that issued the trust preferreds have strengthened, which could improve the value of the portfolio, the abbreviated time frame to divest the securities would not provide the Company the opportunity to hold disallowed securities until the anticipated recovery of their amortized cost. Consequently, all covered CDOs (available-for-sale and held-to-maturity) will be adjusted to fair value through an Other than Temporary Impairment non-cash charge to earnings.

Including the charge, Zions estimates that its pro forma September 30, 2013 Basel I Tier 1 common equity ratio would have been approximately 73 bps lower at 9.74%, down from the actual 10.47%, and from 9.80% at December 31, 2012. Furthermore, Zions estimates that its pro forma September 30, 2013 tangible common equity to tangible asset ratio would decline by approximately 6 bps to 7.84%, down from the actual 7.90%, and 7.09% at December 31, 2012.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria – Intrinsic and Support Assessments, and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found at http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

[Amended on August 7, 2014, to reflect actual applicable methodologies used and sources of information]

Lead Analyst: Mark Nolan
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 5 January 2005
Most Recent Rating Update: 31 May 2013

For additional information on this rating, please refer to the linking document under Related Research.