Zions’ Capital Raising Plans on Track

On June 29, 2009, Zions Bancorporation (ZION - Analyst Report) unveiled in a filing with SEC that several capital building plans taken by the company on June 1 are on track. The company expects to raise up to $250 million through a common equity distribution program over two to three quarters. Through June 26, the company had issued 8.553 million common shares under the distribution program at an average price per share of $13.92. Net of commissions, this has resulted in proceeds of $116.6 million. The company further expects to raise a total of $120-125 million by June 30 (net of commissions). This implies that the company is moving according to plan to shore up its capital position.

The company has also completed a tender offer to purchase a total of 4,020,435 depositary shares. With an anticipated clearing price of $11.50 per share, this would result in a contribution to common equity of $54.3 million, which is $4.3 million greater than the proceeds expected in June 1. Also, $230,135,000, or 16.44%, of the company's outstanding subordinated debt was tendered in the Exchange Offer to receive new subordinated debt without the conversion feature. The Company anticipates accepting all such debt validly tendered. This would also result in a slightly larger contribution to common equity than considered by the June 1 estimates.

We think with these actions to build a strong equity base, in line with its plans, the company is significantly poised to improve its financial health. Also, as we have noted previously, Zions seems much more focused now than it has been for a number of years. After restructuring the operations of Vectra Bank, closing its supermarket branches in Utah, and disposing its e-commerce subsidiary, Zions is now consolidating the systems of its various community banks.

However, competitive pressures are high throughout the banking industry and we expect continuous deposit pricing pressures as well as growth in higher cost funding accounts to continue to reduce Zions' NIM, creating headwinds on the revenue front. On a price-to-book basis, the shares trade at a 71% discount to the median of its peer group (Bank of Hawaii [BOH - Snapshot Report], BOK Financial [BOKF - Analyst Report], Cullen/Frost Bankers [CFR - Snapshot Report], City National [CYN - Snapshot Report], East West Bancorp [EWBC - Snapshot Report], International Bancshares [IBOC] and UB). The discount looks stretched, given a negative ROE at this point. Thus, we maintain our Sell recommendation on the shares of Zions.