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Wednesday, June 18, 2008 10:34 AM

Fifth Third Clobbered In Capital Raising Plan

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Last Friday, Fifth Third Bank was walloped on Downgrades by Bank of Montreal.

The cost of uncollectible debt "will come in higher than management's forecast, and more aggressive reserve-building will be needed," analyst Peter Winter wrote in a note to investors. The company may cut its dividend by "at least" half and "possibly will need a capital infusion," he said.

Fifth Third fell $1.52, or 10 percent, to $13.17 at 4 p.m. in Nasdaq Stock Market trading, the biggest drop since at least 1984. The Cincinnati-based lender declined 48 percent this year and said in April that profit fell for the ninth straight quarter on bad loans.

Fifth Third's loan portfolio is 19 percent in Michigan and 10 percent in Florida, two "very stressed markets," Winter said. He lowered his full-year earnings estimate to $1.62 a share from $1.93.
Fifth Third To Raise $2 Billion and Slash Dividend

Fifth Third is down another 15% this morning on news it will raise $2 billion capital, cut dividend.
Fifth Third Bancorp (FITB), a large U.S. regional bank, said on Wednesday it plans to raise at least $2 billion of capital and will slash its dividend by 66 percent to cope with mounting credit losses.

Fifth Third said it expects to issue $1 billion of convertible preferred shares and raise at least $1 billion more by selling non-core businesses in the next several quarters.

It also said it will cut its quarterly dividend to 15 cents per share from 44 cents.

"We expect these actions to enable us to weather further depreciation in home prices as well as a significant weakening in economic activity," Chief Executive Kevin Kabat said in a statement. "Our bottom-line results won't meet our expectations. We are not satisfied."
Fifth Third thinks those actions will "enable us to weather further depreciation in home prices". In other words Fifth Third thinks it might survive. We will see, but I doubt it.

Game Has Changed

Minyan Peter, former treasurer for a major US bank offered these comments on Fifth Third.
While the announcement out of Fifth Third this morning is simple, I can't understate its importance.

Fifth Third to Sell certain noncore businesses.

By all accounts the market for hybrid securities - straight preferred and convertible preferreds - for financial institutions has or is in the process of closing. This now leaves institutions with the Sophie's Choice of either wickedly diluting shareholders (some again) through the issuance of common stock or selling off "non core" assets to cover losses.

Like the last minutes of "Around the World in 80 Days", banks will now burn the side of the ship with hopes of making it to shore.

Please take note: The game has changed.
Fifth Third Strategy Blows Sky High

Minyanville's Mr. Practical chimed in with his analysis on what went wrong at Fifth Third.
Fifth Third Bancorp's (FITB's) strategy over the past 10 years was to buy up as many small banks as possible in the Ohio, Indiana, Kentucky area, mark them up in value, and then sell the entire bank to a large money center bank.

The credit crunch has made a shamble of its strategy/ponzi scheme.

No bank can buy it and now it owns all the bad debts of these small banks. There's no value left.

FITB has languished in financing infrastructure to provide good service to customers while concentrating on its roll-up strategy and has lost many customers to PNC (PNC) banks which has entered the area and performed well. This is evidenced by PNC stock price vs. FITB.
Act Of Desperation At Fifth Third

The above comments from Minyan Peter and Mr. Practical help put Mike Morgan's May 30th post Four Cheers for Fifth Third Bank into perspective.
Fifth Third Trumps the Pack - Fifth Third is actually offering mortgages to buyers of their REOs, and demanding that their agents follow their policies. This means their properties have a better chance of selling at a better price and in less time. All of this means real dollars, not the ka ka created by the Street. Fifth Third is so serious about this program that they provide their REO brokers with two flyers that MUST go in all REO properties. They even tell you where the flyers go . . leave the flyers in the kitchen. On the negative side, they could take this a step further, but this is a start. And it doesn’t stop there.

Fifth Third in the Field - They send managers out into the field to visit properties and spot check with agents. Now that’s unique. We have analysts that can work at home. And we have executives that wouldn’t think of leaving their cushy offices. But Fifth Third sends managers out to inspect their REO properties and meet the brokers. I’ve got nothing but high-fives and three cheers for Fifth Third. If more financial institutions worked on the solution, we might avoid an economic melt down. Unfortunately, as of now, Fifth Third is the ONLY lender addressing the problem, instead of feeding it. But . . . .
Fifth Third was dumping REO assets because it finally came to the realization it had to. More banks will join the party. And there will be a commercial real estate fire sale as well. The process is nowhere near complete; in fact, it's barely started. Worse yet, the prices banks will receive in these distressed sales will be pitiful compared to the prices on the books. I am confident Fifth Third will be back again raising capital. So will Citigroup, Merrill Lynch, Washington Mutual, Wachovia, and others.

Mike "Mish" Shedlock
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