ZION Gets a 'Junk' Rating

ZION reports loss for 1Q09; Moody's downgrades rating to Junk

Zions Bancorporation (ZION - Analyst Report) reported its 1Q09 results yesterday after market close. Net loss for the quarter was $832.2 million, or $7.29 per diluted share, mainly due to impairment and valuation losses of $1.35 per diluted share and noncash charges from goodwill impairment of $5.55 per diluted
share. After excluding special items, the loss from core banking operations was $0.39 per diluted common share.

After the results, Moody's slashed Zions' senior debt rating eight notches to "B2," (junk grade), with a "negative" outlook, from "A3" (medium investment grade). Moody's rating action was due to significant pressure on the bank's capital position because of its large commercial real estate and collateralized debt obligation portfolio.

Net loans and leases were $41.9 billion at March 31, 2009, up 2.6% from $41.7 billion at December 31, 2008. Average total deposits for the quarter increased 25.7% sequentially to $42.1 billion.

Net interest margin was down to 3.93% for 1Q09, from 4.20% for 4Q08, mainly due to increase in the short-term investments and an increase in nonaccrual loans. Net interest income decreased $33.6 million to $474.8 million compared to $508.4 million for prior quarter. Non-interest income for the quarter was a negative $111.6 million compared to a negative $82.3 million for the prior quarter. The loss was mainly due to impairment and valuation losses on securities.

Credit quality deteriorated sharply and nonperforming assets increased to 4.00% of net loans and leases, at March 31, 2009 compared to 2.71% at December 31, 2008, mainly due to deterioration in the commercial real estate loans in Nevada, Arizona and Texas and commercial and industrial loans in Utah. The provision for loan losses was $297.6 million, up from $285.2 million for last quarter.

The shares are trading down about 22% this morning. We maintain our Sell recommendation on the shares.