Fifth Third

5/3 challenge formidable
Regional banks in for bumpy ride next few months, analysts say
BY ALEXANDER COOLIDGE ACOOLIDGE@ENQUIRER.COME-mail

What's next?
Some Fifth Third Bancorp investors, employees and customers may have been asking that question Thursday and wondering how the possible answers could affect them, a day after the company said it needed strong medicine to maintain its financial strength.
Analysts say regional banks such as Fifth Third are in for a choppy ride over the next several months as a housing market slowdown that started in subprime lending has spread to more traditional lenders.
The Cincinnati-based bank Wednesday announced it needed to raise at least $2 billion to boost capital on its balance sheet. It said it would also sell an unspecified "non-core" business unit for $1 billion or more and sell $1 billion worth of preferred convertible stock. It cut its dividend by two-thirds and warned its profits would be lower because it needed to keep more cash on hand to cover an increasing number of bad loans.
While Fifth Third is not a major subprime player, the drop in housing prices across the nation and a slowing economy have soured a growing number of traditional loans made to businesses and consumers. Of the nearly $1.6 billion in nonperforming assets as of March 31, more than $1 billion of them were commercial loans, mortgages, construction or leases made to businesses, and $339 million were residential or home-equity loans to consumers.
Though Fifth Third's nonperforming assets represent a fraction of the $80 billion worth of its loans outstanding, the bank needs more money on hand to cover potential future losses.
Fifth Third projected its nonperforming assets will hit about $2.3 billion by June 30 and predicts it will charge off - or deem uncollectible - another $1 billion by year's end.
Analysts say Fifth Third is the latest Midwestern regional bank to struggle with a deteriorating loan portfolio - National City, Key Bancorp and Huntington Bancshares have seen their shares punished over the last several months.
Shares in Fifth Third closed Thursday at $9.75, up 49 cents or 5.3 percent, after a 27 percent drop Wednesday.
"After months of similar assertions from other companies in the sector, no one should be surprised if investors are skeptical, especially considering that both the commercial lending and home equity loan portfolios are heavily concentrated in Ohio, Michigan and Florida," wrote Kathleen Shanley, an analyst with Gimmie Credit in New York, in a note to investors.
Fifth Third said it would seek a buyer for a "non-core" operation but didn't specify what business it might sell off. Analysts speculated the bank might sell either its processing unit, Fifth Third Processing Solutions, or its investment advice business, Fifth Third Asset Management Inc. The company said it would sell the business in the next several quarters.
Fifth Third employs 8,000 in Greater Cincinnati and Northern Kentucky. In addition to uncertainty about whether they could remain with their current employer, many are also shareholders - as are untold numbers of local retirees.
While investors in Fifth Third have seen their stock in the company lose 61.2 percent of its value this year, they are not alone in their suffering.
The S&P Regional Bank Index - of which Fifth Third is one of 12 members - has lost 39 percent of its value, and the KBW Bank Index of 24 national and regional lenders - which also includes Fifth Third - has lost 28.4 percent of its value. National City shares have slumped 68.7 percent and Key shares have dropped 51.6 percent since Jan. 1.
While the investment community has been watching financial stocks in general for buying opportunities, experts say the clouds haven't cleared in the industry and some share prices could still get pushed lower.
Matt McCormick, a portfolio manager at Bahl & Gaynor downtown, said the industry could eventually see takeovers as it begins to recover in the next two years. He sees US Bancorp and PNC Financial Service Group as potential acquirers of weaker Midwestern counterparts.
"They would be in a position to pick up the pieces when and if they decide to act," he said, adding that industry consolidation right now was less likely because bad loans throughout the industry are still growing.
The nation's struggle with foreclosures and the subprime meltdown have infected the entire real-estate market. Foreclosures and distressed sales have flooded the housing industry with excessive supply, which has forced overall prices down as demand hasn't increased.
As a result, many real-estate developers or builders are stuck with housing they can't sell at an acceptable price to pay back loans to the banks that financed them.
Fifth Third also has seen an uptick in consumer loans such as those for home equity and cars going bad.
Finally, Fifth Third customers won't likely be affected by the turmoil this week. The company doesn't plan to close any local operations.