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Fifth Third Bancorp (FITB - Analyst Report) is likely to recognize a pre-tax gain of approximately $85 million (around $55 million after-tax) in the third quarter of 2013 from the partial sale of its stake in Vantiv Inc. (VNTV - Snapshot Report). The proceeds from the sale are expected to aid Fifth Third repurchase its own common shares.

Notably, Vantiv has priced a secondary offering of 20 million shares of its Class A common stock, which are sold by shareholders. Of the total, Fifth Third sold 5 million shares. Therefore, following these transactions, Fifth Third would record an approximate 9% drop in its ownership position in Vantiv.

The stake sale by Fifth Third comes on the heels of the approval of its capital plan by the Federal Reserve under the Comprehensive Capital Analysis and Review process in Mar 2013.

Stake Sale in Detail

Following this secondary offering of 20 million shares of Class A common stock, around 48.8 million Class B units of Vantiv Holding LLC would continue to be held by Fifth Third. These may be exchanged for Vantiv’s Class A common stock and a warrant, which are exercisable as well as exchangeable into Vantiv’s Class A common stock.

The remaining economic interest of Fifth Third in Vantiv’s future earnings would be approximately 25.1%. Notably, Fifth Third’s first-quarter 2013 results included a pre-tax benefit of $34 million on the valuation of the warrant, held by Fifth Third in Vantiv, while second-quarter 2013 results included a pre-tax benefit of $242 million on the sale of shares of Vantiv and pre-tax $76 million on the valuation of the warrant held in Vantiv.

The Back Story

U.S.-based Vantiv, formerly known as Fifth Third Processing Solutions (FTPS), is a payment processing company dealing with more than 12.9 billion payment transactions valued at $426 billion annually.

Fifth Third had spun-off FTPS in 2009, following a joint venture that was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in Jun 2011. Notably, Vantiv Inc. opted for an initial public offering of Class A shares of the company. The offering was completed on Mar 21, 2012.

Our Viewpoint

Any measures that would help optimize the balance sheet and share buybacks is encouraging and represent an efficient use of funds. Such actions would help create value for shareholders.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy along its footprints. Its traditional commercial banking franchise, diverse revenue mix, declining nonperforming assets and enhanced capital position serve as positive catalysts for the stock. Further, we believe that its capital deployment activities will boost shareholders’ confidence.
 
However, a low interest-rate environment, regulatory issues as well as competitive pressures are the headwinds.
 
Fifth Third currently carries a Zacks Rank #3 (Hold). Some better performing banks include BankUnited, Inc. (BKU - Analyst Report) with a Zacks Rank #1 (Strong Buy) while Citigroup Inc. (C - Analyst Report) sports a Zacks Rank #2 (Buy).

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