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Fitch Lowers Rating on Fifth Third

The Midwest bank said it was setting aside cash for losses on home equity and other loans.

Updated from Dec. 18.

Fitch Ratings on Wednesday lowered its individual rating for

Fifth Third Bancorp


, a day after the Midwest bank upped its dividend, but warned that fourth-quarter earnings would not meet Wall Street's expectations.

Fitch lowered its individual rating for Fifth Third to B from A/B and downgraded its outlook to negative from stable, as the bank sets aside extra cash for losses on home equity loans and certain commercial loans. Fitch affirmed its long- and short-term issuer default ratings. for the bank

Fifth Third shares were sinking 2.3% to $25.94 in recent trading.

The bank expects quarterly earnings in the range of 24 cents to 27 cents and earnings for the full year to be in the range of $2.19 to $2.22, the Cincinnati, Ohio-based company said in a

Securities and Exchange Commission

filing late Tuesday.

Analysts polled by Thomson Financial expect Fifth Third to earn 65 cents a share in the fourth quarter and $2.71 for the full year.

In a separate announcement, Fifth Third upped its quarterly dividend by 10% to 44 cents a share.

Contributing to Fifth Third's lower earnings is the bank's plan to take a $275 million provision for credit losses -- nearly double its provision in the third quarter -- while charged off loans are expected to be $170 million in the quarter. The increase in provision will bring Fifth Third's reserve-to-loan ratio to 1.15%, it said.

Fifth Third is also taking a "non-cash charge" in order to "lower the current cash surrender value of one of our bank-owned life insurance policies", or BOLI, it said. The writedown is expected to lower other noninterest income by approximately $100 million to $110 million, Fifth Third said.

"The increase in provision expense for loan and lease losses is primarily driven by higher current charge-offs as well as higher loss expectations resulting from trends in nonperforming and other criticized assets," the filing said. "The increase in allowance for loan losses is being driven primarily by higher allocations related to home equity loans as well as commercial construction and commercial mortgage loans."

The increases in charge-off ratios within the consumer portfolio is fueled by "significantly higher home equity and mortgage losses" as well as the move of approximately $2 billion of auto loans into the bank's held-for-sale category over the second half of 2007, it said.

Nonperforming assets are expected to jump by 49% to 1.3% of loans, leases and other real estate owned, the company said.

The charge-off ratio on commercial loans is expected to be approximately 0.63%, with approximately 0.13% related to a $15 million fraud-related charge-off on a $19 million commercial loan, Fifth Third said.

Fifth Third's warnings as several other banks including

Bank of America








and its intrastate rival

National City


, warned of writedowns and increasing provisions for loan losses as a result of the deteriorating mortgage industry.

Nat City said in a regulatory filing on Monday that it plans to set aside an extra $700 million in the fourth quarter for loans that have deteriorated since Sept. 30.

The company also incurred about $200 million of charges in October and November in its mortgage business due to lower loan sale revenue, "scratch-and-dent" losses, unfavorable mark-to-market adjustments and general poor market conditions in the mortgage market, it said.