Fifth Third To Raise $2 Billion Capital, Cut Dividend

Fifth Third Bancorp, a large U.S. regional bank, said it planned to raise at least $2 billion in capital and would slash its dividend by 66 percent to cope with mounting credit losses, causing its shares to fall as much as 18.6 percent to their lowest level since 1995.

The second-largest bank based in Ohio said it would sell $1 billion of convertible preferred shares and at least $1 billion of "non-core" businesses over the next several quarters.

It cut its quarterly dividend to 15 cents per share from 44 cents, saving well over $600 million a year.

Fifth Third said credit losses will result in second-quarter profit of 1 cent to 5 cents per share, its 10th straight quarterly profit decline. Analysts' average profit forecast is 42 cents per share, according to Reuters Estimates.

"It reflects the difficult credit environment," said Gary Townsend, co-founder of Chevy Chase, Maryland-based money manager Hill-Townsend Capital. "We will continue to see dividend cuts and capital raises. There is no reason to think it is over."

Many large banks have raised capital and cut their dividends this year as the housing and credit market crises deepen further than many observers expected.

Other banks to undertake similar actions include National City Corp and KeyCorp, Ohio's largest and third-largest banks. The state has been among the hardest-hit by the housing downturn.

Kevin Kabat, chief executive of Cincinnati-based Fifth Third, said in a statement that his actions should help Fifth Third weather further home price declines and "significant weakening" in economic activity.

"Our bottom-line results won't meet our expectations," Kabat added. "We are not satisfied."

He was unavailable for further comment, spokeswoman Debra DeCourcy said. Fifth Third said it may also incur a $250 million charge over its accounting for leveraged leases. KeyCorp and Wachovia have projected larger charges for similar accounting.

In morning trading on the Nasdaq, Fifth Third shares fell $1.97, or 15.5 percent, to $10.76 after earlier falling to $10.36.

The KBW Bank Index was down 3.6 percent.

Boosting Capital

Fifth Third said its moves would help it boost its Tier-1 capital ratio, a measure of its ability to cover losses, to 8.5 percent. Regulators call 6 percent "well capitalized."

The bank ended March with $111.4 billion of assets. It said it operated 1,314 branches in 12 U.S. states, mainly in the Midwest and Southeast.

It has a large presence in Florida, also hard-hit by the housing crunch. This month, Fifth Third paid $1.1 billion for North Carolina's First Charter.

On Tuesday, Goldman Sachs analysts said U.S. banks may raise an additional $65 billion of capital to cope with deteriorating credit, on top of $120 billion already raised.

National City raised $7 billion and cut its dividend 98 percent, while KeyCorp raised $1.65 billion and halved its dividend. Both are based in Cleveland.

Separately, Fifth Third named Kabat chairman, replacing George Schaefer, who is retiring. Kabat succeeded Schaefer as CEO in April 2007.

Selling a Jewel?

Fifth Third expects to set aside $700 million to $725 million for loan and lease losses and to incur $340 million to $350 million of net charge-offs in the second quarter. Nonperforming assets will total 2.6 percent of loans, leases and real estate.

The bank said it expects net charge-offs will equal 1.6 percent to 1.65 percent of loans and leases in 2008, and more in 2009, when provisioning will still exceed charge-offs.

Townsend said the bank is most likely to sell Fifth Third Processing Solutions, an electronic payment processing unit that earned $157 million in the year ended March 31, or 16 percent of overall profit. Payment processing generated $853 million of fee income in that period, or 31 percent of the bank's total.

"It has been one of their jewels in generating non-interest income," Townsend said. "To give that up would reflect the degree to which Fifth Third has stretched itself with untimely acquisitions in Florida and First Charter."