DBRS Comments on Fifth Third Bancorp’s JV with Advent International

DBRS today commented on Fifth Third Bancorp’s (Fifth Third or the Company) definitive agreement with Advent International (Advent) where Fifth Third will sell a 51% equity ownership of Fifth Third’s processing business (not including some credit card businesses) and certain put rights for $561 million in cash and conditional warrants. Subject to various regulatory approvals, the transaction is expected to close in the second quarter of 2009.

While the action is clearly positive for building Fifth Third’s capital levels, its ratings (AA (low) for Senior Debt) remain Under Review with Negative Implications where they were placed on January 29, 2009. Fifth Third’s ratings remain under pressure primarily due to asset quality concerns in its consumer loan portfolios with a recessionary economy and rising unemployment while revenues are constrained. The review is expected to be completed within 30 days.

DBRS believes the transaction is positive for Fifth Third in unlocking some of the value in Fifth Third Processing Solutions (FTPS) and providing more capital to absorb expected future credit losses. The transaction is estimated to raise pro forma 12/31/2008 tangible common equity to tangible assets by 94 basis points (bps) to 5.17% and Tier 1 capital 90bps to 11.49%.

Of course the agreement also weakens pre-tax pre-provision revenue by approximately 4.5% ($130mm out of $2.9 billion in 2008 income before taxes, provisions and goodwill impairment). DBRS sees downside in that the agreement reduces Fifth Third’s revenue and earnings stream and divests a majority stake in the Company’s fastest growing business but at the same time realizes that Fifth Third Processing Solutions had been generating negative operating leverage for the past four years.

Despite becoming a minority owner, Fifth Third has retained some upside by receiving warrants for 10% of the equity of the new vehicle as part of the agreement that could have material value if the new FTPS vehicle goes public.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.