First Bank Recap after Goldman Warning? Fifth Third

Cincinnati-based regional to sell convertible preferred, cuts dividend, and targets non-core asset sales.
Stephen TaubJune 18, 2008

As if on cue to illustrate this week’s Goldman Sachs warnings about the worsening troubles of regional banks, Cincinnati-based Fifth Third Bancorp announced some hard decisions designed to shore up its capital.

Fifth Third said it plans to sell $1 billion of convertible preferred stock, using proceeds for general corporate purposes. In addition, it slashed its quarterly dividend to 15 cents a share from 40 cents, and said it would sell certain non-core businesses, supplementing common equity capital by at least $1 billion. The transactions should be completed over the next several quarters, it said.

In conjunction with the actions, and recognizing a more difficult operating environment, Fifth Third said it is revising its capital targets, and now targets an 8 to 9 percent range for its Tier 1 capital ratio.

“The convertible preferred share issuance and dividend reduction will allow us to readily meet our higher Tier 1 capital ratio target throughout the remainder of 2008,” the bank said. “We believe, given the uncertainty with respect to trends in the economy and credit environment, that proceeding with the sale of certain non-core businesses will ensure we remain within our capital ratio target as we move through 2009.”

In response to these announcements, Moody’s Investors Service placed the long-term deposit and debt ratings of Fifth Third and subsidiaries on review for possible downgrade. At the same time, Moody’s affirmed the short-term ratings on Fifth Third and subsidiaries. Moody’s said it took the rating actions because it views much of the deterioration in Fifth Third’s key credit fundamentals — including risk-adjusted profitability and efficiency — as likely to be permanent.

“Most significantly, the bank’s risk-adjusted profitability and efficiency are well below Moody’s expectations at Fifth Third’s current ratings level,” said Moody’s senior credit officer and lead analyst Peter Routledge, in a report. “Fifth Third’s profitability and efficiency are likely to remain below our expectations because, in Moody’s opinion, spreads on its loan portfolio will remain tight and provisions for loan losses will grow in the foreseeable future.” He also noted that “deteriorating asset quality at Fifth Third also contributed to our decision to place the ratings on review for downgrade.”

On Tuesday, Goldman, Sachs cautioned that American banks may need to raise another $65 billion of capital to deal with their losses from the credit crisis. “Banks will not turn until a peak in credit costs is in sight,” wrote Goldman analysts. “Moreover, weaker banks are unlikely to benefit from consolidation as bank deals always slow when credit is deteriorating and larger banks are hamstrung by their own problem assets as well as accounting requirements.”