Fifth Third Raising Capital

Earlier Thursday, Fifth Third Bancorp (FITB) announced the completion of its $1.0 billion secondary stock offering (early 158 million shares at an average price of $6.33 per share) as part of the FITB’s commitment to increase capital by $1.1 billion following the recent “stress test.” The proceeds from this completed stock offering will be available for general corporate purposes. This will include funding the cash portion of the company’s offer to exchange cash and common shares for Series G convertible preferred depositary shares, as well as future repayment of preferred shares held by the government.

This secondary offering largely fulfills FITB’s commitment under the stress tests’ “worst-case scenario.” The company also stated it expects that through this offering and other alternative capital raises, it could general about $2.0 billion for its Tier 1 capital buffer, as well as removing the government’s caveats with respect to the management pay caps.

Even though the company will dilute its common shareholders with the additional shares, the franchise should be able to repay the funds it received from the Troubled Asset Relief Program (TARP) fairly quickly. Currently, FITB is in discussions with regulators to “to devise a plan and timeline for the repayment,” which will include the U.S. Department of Treasury approving an application to repay the funds.

In recent weeks, the shares of FITB have been range bound ($6.00-8.00 per share). Though we would view the secondary offering as a positive, we remain concerned for the overall financial industry as foreclosures continue to rise since the moratorium has been lifted, financial institutions are trending to being landlords with respect to commercial real estate loans (sales at current market prices could potentially lead to recognizing substantial losses, which could hobble the financial viability of the institutions) and the dilution of the current share base as a result of the additional shares, we continue to view the shares of FITB as a HOLD, presently.

We would also note that just two weeks ago, the company stated it would not sell more than $750 million in the secondary offering.

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