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Fifth Third Bancorp (FITB - Analyst Report) is likely to recognize a pre-tax gain of approximately $125 million (around $81 million after-tax) in the second quarter of 2014 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 initiated a new secondary offering of 5.78 million shares of its Class A common stock, sold on behalf of Fifth Third. Therefore, following this transaction, Fifth Third would record an approximate 12% 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 2014.

Stake Sale in Detail

Following this secondary offering of 5.78 million shares of Class A common stock, around 43 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 22.8%. Notably, Fifth Third’s first-quarter 2014 results included a pre-tax negative adjustment of $36 million on the valuation of the warrant, held by Fifth Third 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 initiatives would help create value for shareholders.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovery in the economy of regions where it has a footprint. Moreover, the company’s efforts in reducing its nonperforming assets and operating expenses will serve as catalysts for growth. 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 #4 (Sell). Some better-ranked banks include First Republic Bank (FRC - Analyst Report) and TriCo Bancshares (TCBK - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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