When Fifth Third Bancorp executives talked about divesting noncore business lines, observers' attention quickly focused on the payment processing and asset management units.
Some observers said both could be on the block as part of a multipronged plan the $111.4 billion-asset Cincinnati company unveiled Wednesday to raise $2 billion in capital. Others said it likely would do its utmost to retain Fifth Third Processing Solutions, because the unit is highly profitable and requires little capital.
Fifth Third already has disclosed that it reviewed its options for the processing arm last year, when other companies were divesting similar operations, but it decided to keep the unit.
Selling the processing unit "would be a mistake," said Bradley S. Vander Ploeg at Raymond James Financial Inc.
Peter J. Winter of Bank of Montreal's BMO Capital Markets Corp. said he fells "pretty confident" that the unit is not on the block.
Processing "is their best-performing business," Mr. Winter said. "It's the highest-return business, and it's crucial to their cross-selling initiative. It is much ingrained in the whole business model."
Julie Solar, an analyst with Fitch Inc., would not speculate on what Fifth Third might consider noncore, but she said the processing unit supports the company's debt rating. Fitch downgraded Fifth Third's long-term issuer rating Wednesday to A-plus, from AA-minus, but gave the company a "stable" rating outlook. Ms. Solar said she feels Fifth Third will have "sufficient" capital to weather the credit storm.
Fitch moved after Fifth Third said it would raise $1 billion in convertible preferred shares, cut its quarterly dividend 66%, to 15 cents a share, and raise roughly $1 billion through the sale of "certain noncore businesses."
Analysts said it is more likely to look to shed Fifth Third Asset Management Inc., which managed $22.2 billion of assets as of Dec. 31.
"That would be a sizable business to sell," Mr. Vander Ploeg said.
Asset management has been a tough business for bankers, because getting retail customers to buy mutual funds through branches has proven to be a hard sell, he said. "It's a completely different strategy" from banking.
One industry source, who asked not to be identified, said that Fifth Third likely would keep the private banking operations, and that what is left of its asset management line would net only about $300 million — not nearly what Fifth Third has said it wants to generate.
The company could sell its credit card operations, according to the source. Mr. Winter said it is likely thinking about unloading "some of the loan business," particularly auto lending.
Kevin T. Kabat, Fifth Third's president and chief executive, told American Banker in November that processing is "very, very attractive for us," though he would not rule out a sale. "The question strategically comes to whether or not Fifth Third is realizing the value [of the unit] in the current structure."
In an interview in April, he said the company continues to review its options but still views processing as a good strategic fit.
In the past Fifth Third also has considered selling a stake in the unit — an option the source said the company might reconsider. Late last year the company said Fifth Third Processing was valued at roughly $4 billion, but the source said it is now probably worth $2.5 billion to $3 billion.
Given its need for capital, it might not have a choice but to sell at least a stake in a business that would find a buyer more easily than its other noncore banking businesses, the source said.
Also Wednesday, Fifth Third said that George A. Schaefer Jr. had retired the day before as its chairman, and that the board selected Mr. Kabat to succeed him. (Mr. Kabat will remain the president and CEO.)
In addition, James P. Hackett, the CEO of Steelcase Inc., has succeeded Dudley S. Taft, the president of Taft Broadcasting Co., as the lead director.
Fifth Third said neither Mr. Kabat or Mr. Schaefer were available for comment, and a spokeswoman would not discuss any potential divestitures.
Mr. Winter said it is noteworthy that the capital measures and the corporate governance changes were announced the same day, but he and other analysts did not want to read too much into it.
Mr. Schaefer, 63, was Fifth Third's CEO from 1991 to April 2007 and had been its chairman since 2006. Soon after succeeding him as the CEO, Mr. Kabat began warning investors, along with Christopher Marshall, then its chief financial officer, that credit quality was deteriorating, particularly in Fifth Third's sizable home equity business. (Mr. Marshall resigned last month, and Fifth Third has yet to name a successor.)
In an interview in April, Mr. Kabat said it had become hard to forecast credit quality. "We've got really good visibility 30 days out, OK visibility 90 days out, but it gets really foggy beyond that."
In a press release Wednesday, Mr. Kabat said his company expects credit quality to deteriorate into next year. Loan losses could reach 1.7% of loans in the second half, Fifth Third said, and investors should expect next year's net chargeoffs to be higher than this year's. Fifth Third expects to report a loan-loss ratio of between 1.6% an 1.65% for the full year. Still, even if the ratio were nearly double that, Fifth Third's Tier 1 capital ratio would remain within its target range of 8% to 9%. The Tier 1 ratio was 7.72% on March 31. In the release, Mr. Kabat said that he expects the capital plan "to enable us to weather further depreciation in home prices as well as a significant weakening in economic activity." Shares of Fifth Third tumbled more than 15% before the market opened, and continued to slide afterward. Mr. Winter said the stock dropped in part because investors penalized the company for their broad concerns about credit quality among regional banking companies. Fifth Third closed down more than 27%.
