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Banks

Fifth Third to raise $2 bln capital, cut dividend

BANGALORE (Reuters) - Fifth Third Bancorp FITB.O, a large U.S. regional bank, said it plans to raise at least $2 billion in capital and slash its dividend 66 percent to cope with mounting credit losses, causing its shares to fall more than 20 percent to their lowest level since 1995.

The second-largest bank based in Ohio said it will sell $1 billion of convertible preferred shares and raise at least $1 billion more capital from selling “noncore” businesses over the next several quarters.

It cut its quarterly dividend to 15 cents per share from 44 cents, a move that should save well over $600 million a year.

Fifth Third said it faces mounting credit losses, especially in residential real estate, commercial mortgage and commercial construction portfolios in Florida and Michigan.

The bank said these may limit second-quarter profit to between 1 cent and 5 cents per share, its 10th straight quarterly decline. Analysts’ average forecast was 42 cents per share, according to Reuters Estimates.

“It reflects the difficult credit environment,” said Gary Townsend, co-founder of Chevy Chase, Maryland-based money manager Hill-Townsend Capital. “We will continue to see dividend cuts and capital raises. There is no reason to think it is over.”

Many banks have raised capital and cut their dividends as the housing and credit market crises deepen further than many investors expected.

These banks include National City Corp NCC.N and KeyCorp KEY.N, Ohio's largest and third-largest banks. The state has been among the hardest hit by the housing downturn.

Goldman Sachs & Co analysts this week said U.S. banks have raised $120 billion of capital, and may need $65 billion more.

“This is a reflection of all the overleverage and the lending binge we have gone through,” said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion. “The write-downs obviously are not over.”

Kevin Kabat, chief executive of Cincinnati-based Fifth Third, said his actions should help the bank weather further home price declines and “significant weakening” in economic activity.

“Our bottom-line results won’t meet our expectations,” Kabat said in a statement. “We are not satisfied.”

He was unavailable for further comment, spokeswoman Debra DeCourcy said.

Fifth Third said it may also incur a $250 million charge over its accounting for leveraged leases. KeyCorp and Wachovia Corp WB.N have projected larger charges related to such leases.

In late afternoon trading, Fifth Third shares were down $2.63, or 20.7 percent, to $10.10 on the Nasdaq.

The KBW Bank Index .BKX was down 2.2 percent, with larger declines in several banks heavily exposed to Florida or Michigan, including BB&T Corp BBT.N, Comerica Inc CMA.N, Regions Financial Corp RF.N and SunTrust Banks Inc STI.N.

The 52-week high for Fifth Third shares is $43.20, set last June 20, according to Reuters data.

BOOSTING CAPITAL

Fifth Third said its moves would help it boost its Tier-1 capital ratio, a measure of its ability to cover losses, to 8.5 percent. Regulators call 6 percent “well capitalized.”

The bank ended March with $111.4 billion of assets. It operates 1,314 branches in 12 U.S. states, mainly in the Midwest and Southeast. This month, Fifth Third paid $1.1 billion for North Carolina’s First Charter Corp.

U.S. banking regulators have expressed concern about banks’ capital levels in light of worsening conditions in housing, commercial real estate and construction lending.

National City raised $7 billion and cut its dividend 98 percent, while KeyCorp raised $1.65 billion and halved its dividend. Both are based in Cleveland.

Separately, Fifth Third named Kabat chairman, replacing George Schaefer, who is retiring. Kabat succeeded Schaefer as chief executive in April 2007.

SELLING A JEWEL?

Fifth Third expects to set aside $700 million to $725 million for loan and lease losses and to incur $340 million to $350 million of net charge-offs in the second quarter. Nonperforming assets will total 2.6 percent of loans, leases and real estate.

The bank said it expects net charge-offs will equal 1.6 percent to 1.65 percent of loans and leases in 2008, and more in 2009, when provisioning will still exceed charge-offs.

Townsend said the bank is most likely to sell Fifth Third Processing Solutions, an electronic payment processing unit that earned $157 million in the year ended March 31, or 16 percent of overall profit. Payment processing generated $853 million of fee income in that period, or 31 percent.

“It has been one of their jewels in generating noninterest income,” Townsend said. “To give that up would reflect the degree to which Fifth Third has stretched itself with untimely acquisitions in Florida and First Charter.”

Goldman Sachs & Co is advising on the preferred stock sale.

Additional reporting by Jennifer Ablan in New York; Editing by Brian Moss

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