(Recasts; adds details, background, stock activity)
Feb 4 (Reuters) - Zions Bancorp (ZION.O) would need to raise as much as $700 million in common equity before it repays the Federal bailout funds, an analyst at Keefe, Bruyette and Woods said, and downgraded the stock by a notch to “underperform.”
Shares of the Salt Lake City, Utah-based large lender fell as much as 6 percent to $17.45. They later recovered some of their early losses to trade down 4 percent at $17.82.
The western U.S. banking chain could be pressured to repay the money it received under the Treasury’s Troubled Asset Relief Programme (TARP), after PNC Financial Services Group (PNC.N) raised funds to repay the same, analyst Brian Klock said in a note to clients.
PNC sold $3 billion worth of stock on Wednesday at $54 a share, just below its Tuesday closing price, raising funds to repay the bank’s $7.6 billion government bailout. [ID:nN03168801]
Most of the major banks such as Wells Fargo & Co (WFC.N) and JPMorgan Chase & Co (JPM.N) have already repaid TARP funds, freeing them from government restrictions on dividend payments, share buybacks and some compensation restrictions, thereby putting increased pressure on their mid-cap peers to follow suit
“We believe Zions’ shares will be under pressure until the question of its capital adequacy is answered,” analyst Klock said.
Zions stock has risen 45 percent this year and some profit taking could be expected with the uncertainty surrounding the possible near-term capital raise, he added.
During the first half of the session, traders exchanged about 56,000 put option contracts in Zions, five times their recent average daily turnover, according to option analytics firm Trade Alert.
“The options trading activity in Zions reflects some uncertainty about the outlook for the shares of the regional bank,” said Frederic Ruffy, options strategist at WhatsTrading.com.
“That view was expressed by active trading in Zions put options with more than 54,000 contracts traded in the first two hours on Thursday.”
One notable trade was the April $17-$13 put spread which was bought for a $1.40 debit and this spread would yield its maximum profit if shares fall 26 percent from its current level of $17.60 to $13 by mid-April, he said.
Investors often turn to equity put options -- which convey the right to sell the company’s shares at a fixed price within a specified time period -- to speculate on potential stock price weakness or to protect an existing stock position. (Reporting by Jochelle Mendonca and Anurag Kotoky in Bangalore, and Doris Frankel in Chicago; Editing by Anil D‘Silva)