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Fifth Third to Redeem TruPS, Again

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On Monday, Fifth Third Bancorp (FITB - Free Report) announced redemption of trust preferred securities (TruPS) worth $862.5 million yet again, after declaring its plan to redeem $575 million in TruPS only last week.

Fifth Third’s decision to redeem TruPS follows the announcement of the new capital rules by the Federal Reserve in June 2012. As per the new proposal, the TruPS issued prior to May 19, 2010 would not be considered for the calculation of Tier 1 capital ratio.

This time around, TruPS redemption by Fifth Third will include the redemption of 7.250% TruPS issued by Fifth Third Capital Trust VI with a scheduled maturity date of November 15, 2067. It stated that these would be redeemed at $25 per TruPS.

The redemption amount will also include accrued and unpaid distributions until the redemption date arrives. Fifth Third will use its existing available cash to fund the redemptions.

The TruPS redemption will take place on August 8, 2012, with Wilmington Trust Company, a subsidiary of M&T Bank Corporation (MTB - Free Report) , as the paying agent.

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With these TruPS redemptions, Fifth Third joined the bandwagon of major financial institutions that have made their own announcements of TruPS redemptions in the recent weeks.

Recently, TCF Financial Corporation came up with the announcement of redeeming $115 million in TruPS while Bank of America Corporation (BAC - Free Report) announced $3.9 billion in TruPS redemption.

Moreover, The PNC Financial Services Group Inc. (PNC - Free Report) announced that it will redeem trust preferred securities (TruPS) worth $967.5 million in total. JPMorgan Chase & Co. (JPM - Free Report) also declared its plan to redeem about $9 billion in TruPS in July. Further, Citigroup Inc. (C - Free Report) , whose extra capital deployment request was rejected by the Fed, has also announced the redemption of TruPS.


The redemption of TruPS is a strategic fit as such moves provide banks with the opportunity to lower their interest expenses. Moreover, it will also help in satisfying the regulatory norms since according to the Dodd-Frank Act, from 2013, banks will no longer be able to consider these securities as regulatory capital.

Notably, according to the 2012 stress-test results, Fifth Third received permission to continue its quarterly common dividend at 8 cents per share and redeem up to $1.4 billion in certain TruPS. Moreover, the company was allowed to make share buybacks from the gains of the Vantiv IPO, formerly Fifth Third Processing Solutions, LLC. As a result, recently, the company bought back shares worth $75 million.

We believe that with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Its traditional commercial banking franchise and solid market share in key markets should bode well going forward. Strategic capital actions also may garner positive results. Regulatory issues and competitive pressures are the headwinds for the stock.

Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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