Updated from Dec. 2
Fifth Third Bancorp
warned late Thursday that fourth-quarter earnings will fall far short of analyst expectations because the bank's securities portfolio got whacked by rising interest rates.
The Cincinnati-based bank said it expects to earn between 28 cents and 30 cents in the quarter. Before the announcement, the Thomson Financial consensus estimate had the bank earning 82 cents a share.
In premarket trading Friday, shares of Fifth Third fell $3.66, or 7.1%, to $48.
The big earnings miss is due to a series of steps the bank is taking to reposition its balance sheet for additional interest rate increases. Some of those steps involve the sale of $6.5 billion in securities and the early retirement of $3 billion in long-term debt.
The bank said it expects these steps to result in steep charges to earnings. It estimates an $80 million pretax charge due to the securities losses and a $260 million charge arising from the cancellation of interest rate swaps.
Interest rate swaps are a hedging device used by banks to protect themselves from wide swings in interest rates. Swaps are often used to hedge against fluctuations in the value of a bank's investment portfolio.
Fifth Third, like many banks, loaded up on mortgage-backed securities during the long period of low interest rates. The value of those investments, however, decreases as interest rates rise.
The Federal Reserve began raising interest rates this summer and has given indications it is not done raising rates.
"The actions we have announced today represent extremely difficult decisions that ultimately we feel are prudent and in the best long term interests of Fifth Third and its shareholders," said CEO George A. Schaefer Jr. "The losses and termination charges in the fourth quarter represent an investment in the future earnings potential of Fifth Third."