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On Thursday, Cincinnati-based Fifth Third Bancorp (FITB - Analyst Report) announced its plan to exit its mutual fund business after vending most of the assets. Fifth Third Asset Management Inc. (FTAM), the asset management subsidiary of Fifth Third, entered into two definitive agreements to sell off its mutual fund assets. However, the company will continue as sub-advisor to some of the mutual funds.
Under the first agreement, Federated Investors Inc. (FII - Analyst Report), one of the largest investment managers, will acquire money market assets worth $5 billion from four Fifth Third money market funds. These assets will be merged by Federated into its existing four Federated money market funds having same investment objectives.
The second deal was entered with Cincinnati-based Touchstone Advisors Inc., a unit of Western & Southern Financial Group. As per the agreement, Touchstone will acquire assets of 16 stock and bond mutual funds worth $3 billion from Fifth Third. At the closing of the transaction and completion of the acquisition of certain assets from Old Mutual Asset Management, Touchstone’s assets under management will increase to $13 billion.
Both the deals await certain regulatory approvals, though the terms were not disclosed. Moreover, agreements are anticipated to be closed in the third quarter of 2012 and are expected not to have a material impact on Fifth Third’s results.
Money market fund managers are under pressure ailing to lingering low interest rates environment and increasing tight regulations. Therefore, Fifth Third came up with the plan of selling mutual fund assets to minimize risk and grow its business in strategically important segments.
The completion of deals will aid FTAM concentrate on core strengths by providing institutionally managed active asset management strategies. Moreover, the company will now be able to offer a wider choice of investment products to its clients.
For a long time, Federated has been working with banks to offer investment products according to the needs of the clients. Therefore, Federated's experience coupled with Fifth Third’s proficiency in credit analysis and fundamental research will help Fifth Third in the evolution of these assets. Moreover, Federated looks forward to many such opportunities to provide cream services to its clients.
Further, increased assets under management give Touchstone various new fund offerings that would benefit its clients.
Of late, the Fed assured Fifth Third that it does not have any objection to the capital actions of Fifth Third including the continuation of its quarterly common dividend of 8 cents per share and redemption of up to $1.4 billion in certain trust preferred securities.
The Fed has not raised any objection regarding the company’s strategy of repurchasing common shares at par with any after-tax gains realized by Fifth Third from the sale of Vantiv Inc. common shares by either Fifth Third or Vantiv.
Going forward, we believe that a diversified traditional banking platform positions Fifth Third well for future growth. Though a tepid economic recovery, a low interest rate environment as well as regulatory changes remain the major headwinds, we think that the company’s proactive steps will help it navigate through these.
Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain our long term “Neutral” rating on the stock.
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