Fifth Third Sells Processing Unit

Fifth Third disposes majority stake in processing unit

On June 30, Fifth Third Bancorp (FITB) sold a 51% stake in its processing business to Advent International, the leading global buyout firm. The deal is valued at $2.35 billion, before any valuation adjustments.

The deal was announced in March this year. Fifth Third will retain the remaining 49% stake in the new company and will also keep its credit card issuing business, including retail credit card and commercial multi-card services.

We are encouraged with this transaction, as it will enable Fifth Third to focus more on its core business while boosting its Tier 1 common equity.

Fifth Third will realize a pre-tax gain of around $1.7 billion or $1.0 billion post-tax on the transaction. Approximately $1.2 billion will be contributed from this transaction to the bank's Tier 1 equity. The company has recently raised $1 billion of capital from its stock offering and completed the tender offer for its preferred shares. The company exchanged $696.2 million in its depository shares which represent 62.9% of the aggregate liquidation amount of its depositary shares. The transaction resulted in the issuance of approximately 60,121,124 shares of common stock and the payment of $229.8 million in cash.

Last week, Fitch Ratings downgraded the long-term issuer default rating of Fifth Third Bancorp and its subsidiary to "A-" from "A" with a negative outlook. Prior to that, Standard & Poor's lowered ratings of 18 banks, including Fifth Third, Wells Fargo & Co (WFC), Huntington Bancshares (HBAN), U.S. Bancorp (USB), KeyCorp (KEY) and Citizens Republic Bancorp (CRBC). Standard & Poor's reduced the bank's counterparty credit rating to "BBB" from "A-" with a negative outlook.

However, we are encouraged with the capital bolstering initiatives of Fifth Third and continue to view its shares a Hold, as we think that asset quality deterioration and the impact of a recessionary economy will restrict earnings in the coming quarters.

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