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Fifth Third to Strengthen Capital Position
Fifth Third Bancorp today announced actions to strengthen its capital position in light of continued deterioration in credit trends during the second quarter of 2008 and its view that conditions are unlikely to improve in the near-term. The Company’s board of directors has approved the following actions:
- The planned issuance of $1 billion in Tier 1 capital in the form of convertible preferred shares.
- A reduction in the quarterly dividend level. The Company declared its second quarter cash dividend on its common stock and set the level at $0.15 per share, a reduction from the previous $0.44 per share quarterly level. The new dividend is payable on July 22, 2008, to holders of record on June 30, 2008.
- The anticipated sales of certain non-core businesses that, if successfully completed, would supplement common equity capital by an estimated additional $1 billion or more. Fifth Third owns several non-strategic businesses that are not significantly synergistic with its core financial services businesses. We expect these transactions to be completed over the course of the next several quarters.
In conjunction with these actions and a more difficult operating environment, Fifth Third is revising its capital targets and is now targeting an 8 to 9 percent range for its Tier 1 capital ratio. The convertible preferred share issuance and dividend reduction will allow us to readily meet our higher Tier 1 capital ratio target throughout the remainder of 2008. We believe, given the uncertainty with respect to trends in the economy and credit environment, that proceeding with the sale of certain non-core businesses will ensure we remain within our capital ratio target as we move through 2009.
We expect our Tier 1 capital ratio at the end of the second quarter of 2008 to be approximately 8.5 percent, which includes the impact of the First Charter acquisition and related purchase accounting adjustments, which reduced tangible equity ratios by approximately 55 bps. This second quarter ratio does not include a potential reduction of approximately 20 basis points to the Tier 1capital ratio that would result from an accounting charge to earnings related to leveraged leases in the second quarter of 2008, if we conclude that we are required to record a charge, as discussed more fully in a Form 8-K filed today with the Securities and Exchange Commission.
For future quarters, we have re-evaluated our capital ratios under a range of scenarios for the credit environment. As part of the analysis of the capital actions described above, we considered the possibility of further deterioration in the second half of 2008, as well as continuation and acceleration of more severely stressed conditions through 2009. While viewed as unlikely, even if 2009 charge-off levels were to exceed 2008 expected charge-offs by up to 85 percent, we would expect our Tier 1 capital ratio to remain within the targeted 8 to 9 percent range. Our current outlook for 2008 net charge-offs is approximately 160 to 165 bps of total loans and leases, with second half 2008 net charge-offs of approximately 170 bps annualized. We currently expect the year-end 2008 ratio of reserves to loans and leases to exceed 2 percent, with the actual amount subject to changes in credit trends and reserve modeling. Additionally, we currently expect 2009 net charge-offs to be higher than 2008 levels and provision expense to continue to exceed charge-offs, resulting in continued growth in our loan loss reserves. The expectations outlined in this paragraph apply irrespective of whether we ultimately determine it is appropriate to recognize an accounting charge to earnings relating to our tax position associated with leveraged leases, referenced in the preceding paragraph and discussed more fully later in the Form 8-K filed today.
The following table outlines the Company’s expected second quarter 2008 capital ratios reflecting the reduction in the second quarter dividend payable and the planned $1 billion convertible preferred share offering. The ratios do not include the benefit of the anticipated asset sales, which would be approximately 85-90 bps depending on the ratio at issue, or the possible effect of a second quarter 2008 charge related to leveraged leases outlined more fully in the Form 8-K filed today. In conjunction with the planned convertible preferred share offering, the Company has replaced its previous tangible common equity target with a tangible equity target reflecting the presence of preferred shares within its capital structure. The tangible common equity ratio at the end of the second quarter of 2008 is expected to be approximately 5.4 to 5.5 percent.