Three Regional Banks to Watch in 2010

Fifth Third Bancorp

Fifth Third Bancorp isn't an obvious choice, given its primarily economically challenged Midwest territory, and the fact that it's yet to pay back its $3.4 billion in government bailout funds like U.S. Bancorp and BB&T, but the Cincinnati-based company could be poised to break out of its rut sooner than later, several analysts contend.

The $111 billion-asset Fifth Third was hit early in the credit cycle mainly by troubled residential mortgages, particularly given its presence the economically challenged Midwest and in Florida.

Yet Todd Hagerman, an analyst at Collins Stewart, who overall is cautious on the regional banks given continued credit quality problems and capital issues, says Fifth Third is "pretty far along in terms of cleaning up the credit problems."

"They significantly strengthened the balance sheet, both in additional capital as well as significantly higher loan loss reserves.," Hagerman says. "And it's a franchise that continues to take market share, notably in its Midwest market."

The company has realized roughly $4.3 billion in charge-offs since June 2008 and has built its loan-loss ratio up to 4.69% -- near the top of the industry, Morgan Keegan analyst Bob Patten writes.

"Management expects net charge-offs to be lower in the fourth quarter due to a reduction in C&I [commercial and industrial] losses, and also anticipates that future reserve building will lessen from the pace seen earlier in the cycle -- both encouraging signs that credit losses could be nearing a peak," Patten writes.

Furthermore, given its position in the distressed Midwest markets, Fifth Third is also likely to be a beneficiary of FDIC-assisted acquisitions of failed banks, "which should provide them with cheap, low-cost deposits and position them for stronger long-term growth," he adds.

Fifth Third has also been among the regional banks most active in restructuring troubled loans and re-default rates of these restructured loans are low compared to other banks, writes Credit Suisse's Craig Siegenthaler.

Siegenthaler expects Fifth Third's shares to rise to $15 by the end of 2010, according to a Dec. 2 note, implying plus-50% appreciation from their close at $9.55 on Thursday.

--Written by Laurie Kulikowski in New York.

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