DBRS Confirms Zions Bancorporation -- Senior at A (low); Changes Trend to Negative

DBRS has today confirmed all ratings for Zions Bancorporation (Zions or the Company) and its related entities, including its Issuer & Senior Debt rating of A (low). At the same time, DBRS has changed the trend on all long-term ratings to Negative from Stable. The short-term ratings remain on Stable trend.

The rating action follows the Company’s release of Q4 2008 and FY 2008 results, which included net losses applicable to common shareholders of $498 million and $291 million, respectively. Driving the quarterly loss was a $354 million goodwill impairment charge, $204 million impairment and valuation losses on securities and $285 million in provisions, 37% of which was for reserve build.

The Negative ratings trend reflects DBRS’s view that Zions faces considerable headwinds over the near-to-intermediate term, including asset quality erosion and the likelihood of additional valuation charges against its securities portfolio, and perhaps the consolidation or at least the purchase of specific assets from Lockhart Funding, an off-balance-sheet commercial paper conduit sponsored by Zions. Sustained elevated asset quality erosion in loans and securities and lack of sustainable earnings generation could trigger potential future negative rating action. Conversely, the absence of elevated credit costs and sustained solid profitability may result in the restoration of the trend to Stable.

The rating confirmation reflects Zions’ adequate liquidity, solid and recently augmented capital and strong presence in the highly stressed, yet demographically favorable, southwestern and western regions of the United States. Ratings also reflect the Company’s volatile profitability and strained asset quality, which remains pressured by its large concentration in commercial real estate.

The Company’s high credit costs continue to reflect deterioration within its residential real estate acquisition, development and construction portfolios. At December 31, 2008, Zions’ non-performing assets (NPA) represented 2.71% of loans versus 2.20% at September 30, 2008, and Q4 2008 net charge-offs (NCO) represented 1.71% of average loans, up from 0.91% for the prior quarter. The increase in NCOs was spurred by declining collateral values on residential acquisition, development, and construction loans in the southwest and Utah. For 2008, loan loss provisions of $648 million exceeded NCOs by 1.6 times. Zions’ allowance for loan loss reserves to non-accruals was moderate at 72%.

Positively, the Company issued $1.4 billion of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program, which helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. DBRS notes that higher levels of capital reflect the new reality of thresholds for banks with strained asset quality. At December 31, 2008, Zions’ estimated Tier 1 and Total risk-based capital ratios were 10.52% and 14.71%, respectively.

The Company’s liquidity profile remains adequate and is underpinned by a core deposit base that accounts for approximately 73% (at September 30, 2008) of net loans. At December 31, 2008, Zions’ securities portfolio represented 8% of total assets. Zions’ access to the Federal Home Loan Bank, Treasury Auction Facility and Federal Reserve Discount Window rounds out its liquidity profile. DBRS comments that Zions’ securities portfolio contains roughly $1.6 billion (carrying value) of bank and insurance company trust preferred asset-backed securities. Roughly $1.5 billion are rated “A” or better. DBRS anticipates further losses within this portfolio, especially as the market remains unstable and the recession deepens.

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

The applicable methodology is Rating Banks and Bank Holding Companies operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.