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Moody's Investors Service, a rating arm of Moody’s Corp. (MCO - Analyst Report), has completed the review for the upgrade in ratings of Zions Bancorp. (ZION - Analyst Report) and its subsidiaries initiated on Oct 3. Following the completion, Moody’s upgraded the long-term ratings of Zions and its subsidiaries, while reiterating the outlook at “Stable”.

Zions’ subordinated debt has been upped to “Ba2” from “B1”, while the short-term rating has been affirmed at “Not-Prime”. Moreover, the company’s primary bank – Zions First National Bank – has been upgraded to “Baa3” from “Ba1” for long-term deposits and to “Prime-3” from “Not-Prime” for short-term deposits.

Further, Zions First National Bank has a standalone bank financial strength rating of “D+”, which has been affirmed. Yet, the baseline credit assessment of “ba1” for the bank has been revised upward to “baa3”.

The rating agency is impressed with Zions’ efforts toward continuously improving asset quality and reducing its risk profile. Moody’s stated that the ratings revision came on the back of improvement in most of the credit metrics. Along with net charge-offs and delinquencies, level of nonperforming assets (NPAs) have also improved. As of Sep 30, 2012, NPAs stood at $1.3 billion, declining more than 50% from the peak attained in late 2009.

Further, Zions has been working hard to lower its risk profile. Though the company commercial real estate (CRE) concentration has declined from the levels before the financial crisis, Moody’s anticipates these to remain high, thereby restraining future ratings upgrade.

Additionally, Zions has considerable investments in trust preferred collateral debt obligations (CDOs) that are tied to the performance of CRE. The risk of managing these investments will result in higher impairment charges in the fourth quarter of 2012.

Moody’s expects that the rationale for future revision will be based on Zions’ efficiency in managing additional risks related to its strategic efforts including diversification of its revenue base (at present significantly dependent on net interest income) to overcome continuing earnings pressure in the low interest rate environment.

The rating upgrades are valuable for Zions as they play a major role in preserving investor confidence in the stock and help boost its creditworthiness in the market.

Zions, currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating. On account of such ratings upgrade, we believe there is a possibility of earnings estimate revisions. This, in turn, is expected to lead to an improvement in its current rank.

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