Fifth Third Bancorp ( FITB - Analyst Report ) is likely to recognize a pre-tax gain of approximately $140 million (around $91 million after-tax) in the fourth quarter of 2012 from the sale of its 15% stake in Vantiv Inc. ( VNTV - Snapshot Report ) . The proceeds would help Fifth Third in buying back its own common shares.

Further, Fifth Third decided to prepay $1 billion of FHLB term debt as part of its efforts to optimize balance sheet and liability costs. The maturity date of the debt was January 5, 2016.

It would lead to a prepayment charge of around $135 million pre-tax while net interest savings through the maturity date is likely to be around the same amount. This would reflect a benefit of around $40–45 million in annual net interest income and a gain of about 4 basis points in net interest margin.

Stake Sale in Detail

As a matter of fact, following this secondary offering of 12.5 million shares of Class A Common Stock, around 71.5 million Class B units of Vantiv Holding LLC would continue to be held by Fifth Third. These may be exchanged for Vantiv Inc.’s Class A common stock and a warrant which is exercisable as well as exchangeable into Vantiv Inc.’s Class A Common Stock.

The remaining economic interest of Fifth Third in Vantiv’s future earnings would be approximately 33.6%. Fifth Third realized $25 million (pre-tax) under equity method earnings in the third quarter of 2012 from its ownership in Vantiv. However, the sale would result in a reduction of around 15% to the earnings.

As a matter of fact, Fifth Third’s plan to buyback its common shares with the gain from Vantiv’s shares sale already got the Federal Reserve’s nod in March 2012. Therefore, following the settlement of this transaction, the company intends to make a repurchase agreement with a counterparty to buyback its own shares with the Vantiv gain.

Notably, the underwriters of the offering have been granted an option to buy up to an additional 1.2 million shares of Vantiv Inc.’s Class A Common Stock at Fifth Third’s share sale price. This would be only for covering over-allotments and exercisable for 30 days from the pricing date. However, if exercised, the impact on Fifth Third is likely to be limited to a maximum of 10% of the impact from the initial sale.

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 after which a joint venture was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in June 2011. Notably, Vantiv Inc. opted for an initial public offering of Class A shares on the company. The offering was completed on March 21, 2012.

Earlier in 2012, Fifth Third completed the buyback of its shares worth $75 million, which was made as per regulatory approval that the company had received in March and was supported by the realized gains from the Vantiv IPO.

In Conclusion

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

For Fifth Third, which currently retains a Zacks #3 Rank (implying a short-term Hold rating), this is could serve as a slight positive, resulting in modest upward estimate revision. This, in turn, could help Fifth Third achieve a better Zacks Rank.