Updated from 11:43 a.m. EDT
Fifth Third Bancorp
hit a new 52-week low after the big Midwestern bank slashed its dividend and said it was raising $2 billion in capital.
The Cincinnati-based bank said the moves to strengthen its capital position were necessary "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 said in a press release.
Fifth Third cut is dividend by two thirds to 15 cents a share. The new dividend will be payable on July 22.
It also plans to add $1 billion to its Tier 1 capital ratios through the sale of convertible preferred stock. The bank's underwriters will have the option to purchase an additional $150 million of depositary shares to cover over-allotments.
The company also plans to sell certain "non-core businesses" over the next few quarters, that would add roughly $1 billion to common equity capital, it said.
Shares recently were falling 18% to $10.49 on trading volume that was five times the average daily volume.
"We are taking a number of significant steps to fortify our balance sheet and improve the quality and composition of our capital base," CEO Kevin Kabat said in a statement. "We expect these actions to enable us to weather further depreciation in home prices as well as significant weakening in economic activity relative to current levels."
"Many areas of our business are performing well," he added. "However our bottom line results won't meet our expectations. We are not satisfied with these results and know that they are as disappointing to investors as well."
Fifth Third joins a host of other banks looking to shore up their balance sheets amid the housing crisis and economic downturn. Other banks including
Bank of America
, among others, have raised capital by issuing preferred shares this year.
Separately, Fifth Third said Chairman George Schaefer is retiring. Kabat will succeed him, completing a succession plan put in place last spring. Schaefer retired from his position as the company's CEO in April 2007. Fifth Third also named James Hackett as its lead director and head of the board's nominating and corporate governance committee. Hackett replaces Dudley Taft, the president and CEO of office furniture maker
, who joined Fifth Third's board in 2001.
The company expects to record a profit of just 1 cent to 5 cents a share for the second quarter, due to the declining credit trends and need for added provisioning, it said in a
Securities and Exchange Commission
filing, which further discussed the company's outlook for the quarter. Analysts on average estimated the bank would make 42 cents a share in the current quarter, according to Thomson Reuters.
Fifth Third will record a provision expense of approximately $700 million to $725 million this quarter, with net charge-offs in the range of $340 million to $350 million, or approximately 165 to 170 basis points of total loans and leases, the filing said.
"The increase in provision expense for loan and lease losses is primarily driven by higher inherent loss expectations resulting from trends in severities of loss on collateral as well as in nonperforming and other criticized assets," the filing said. "Management expects that elevated recent losses are likely to be more indicative of inherent rates of loss in the portfolio than previous loss experience recognized six or 12 months ago."
The company's outlook for net loans written off this year is 160 to 165 basis points of total loans and leases, with charge-offs in the second half of the year at 170 basis points on an annualized basis. Charge-offs next year are expected to be higher than 2008 levels, it said. Fifth Third added that its ratio of reserves to loans and leases will exceed 2% this year.
As a result of the capital raising initiatives, Fifth Third expects its Tier 1 capital ratio to be 8.5% by the end of the month. The company expects its Tier 1 capital to remain in the 8% to 9% range for the rest of the year, "even if 2009 charge-off levels were to exceed 2008 expected charge-offs by up to 85%, we would expect our Tier 1 capital ratio to remain
within the targeted range," the bank said.
This is not the first time Fifth Third has sought additional capital. The bank issued $350 million in trust preferred securities in April.