For Fifth Third Bancorp chief executive Kevin Kabat, the opportunity to tap the Treasury Department's Capital Purchase Program brought a rare stability in a year where almost nothing went according to plan.

Getting to stability is only part of the journey to getting back to a sense of certainty, however. And in an interview last week, Mr. Kabat made clear that Fifth Third must sort through plenty before returning to the certainty needed to whet its appetite for risk. Though the company wants to lend and do acquisitions, capital preservation is job one for the $116 billion-asset Cincinnati company.

"There is a lack of clarity and uncertainty in terms of the environment going forward," he said. Having ample capital "is the bedrock of getting through this current environment."

Mr. Kabat's comments are reflective of a tone that permeates the industry right now. After weathering a late summer and early autumn during which it seemed one financial company after another had to take its turn in the sights of stock market short-sellers, many bank executives are focused on making sure their foundations are solid before grasping for new opportunities.

The Treasury's preliminary approval took pressure off Fifth Third to consider much less palatable ways to raise capital, such as divesting business lines like its payment processing arm. Mr. Kabat said having that business — long seen by analysts as a candidate for divestiture — can be a source of income stability as the company moves through the recession. Revenue from electronic payment processing was flat in the third quarter from the preceding period but rose 10.8% from a year earlier, to $235 million.

Processing "has always been one our core differentiators," he said. "We think it is the best payments business in the country, and it is the fifth-largest in that space. We're glad to have it as a key component of our organization."

When it comes to topics like lending growth and M&A, Mr. Kabat adopts a very cautious tone. Part of a reluctance to talk up the pursuit of growth has to do with the economy, of course. But another part relates to uncertainty about the terms of the capital purchase plan itself. Mr. Kabat is one of several banking executives who have expressed concern about some very open-ended provisions in the agreement in which the government reserves the right to unilaterally change the arrangement's terms at any time.

"I think all of us are operating under a certain set of assumptions," he said, "and there is concern that they could change."

"I hope that isn't necessarily the case," he added. "Changing terms on an agreement in midstream is not good business, and I'd like to believe that it won't … and that the new administration reaches out to the industry for input on some of that as we go through this process."

So Fifth Third for now is not stating near-term grand ambitions for using the $3.5 billion of capital it expects to get from the Treasury. And Wall Street analysts are probably just fine with that, given a sense in the market that the company needs to shore up its defenses.

Most say Fifth Third will probably use the Tarp funds at first to clean up its balance sheet. The company has had two straight quarterly losses after setting aside a total of $1.66 billion to cover possible loan losses. Nonperforming assets in the third quarter jumped 28.7% from the second quarter and fourfold from a year earlier, to $2.83 billion.

Analysts said they expect Fifth Third to earn 4 cents a share this quarter and aggressively build reserves, according to Thomson Reuters.

Frank Barkocy, the director of research at Mendon Capital Advisors, said the company could be more aggressive this quarter with chargeoffs given expectations that it will have more capital. "It will be interesting to see the actions they take in the fourth quarter," he said in an interview Friday. "The interim indications are that their problems have accelerated."

Mr. Kabat would not comment specifically on the fourth quarter, though he said having more capital "certainly gives you more flexibility" in handling problem loans. "We have been aggressively attacking credit and will continue to do so," he said. "Is it where we aspire … to be? No, but I think we are doing a very good job in a difficult environment."

Fifth Third has scant interest in keeping up with the wave of large acquisitions that have let competitors like Wells Fargo & Co., JPMorgan Chase & Co., and PNC Financial Services Group Inc. significantly increase the size of their retail banks. Buffalo's M&T Bank Corp. joined the group Friday, announcing a plan to buy Provident Bankshares Corp. in Baltimore for $401 million of stock (see related story).

"A big acquisition isn't necessarily, in my mind, probably the most ideal situation in the near term because it would be a significant utilization of capital," Mr. Kabat said, though he remains keen to buy deposits from failed institutions or smaller banks in his existing markets. "I don't have to be across America competitively," he added. "I think more and more the question strategically will be the depth of how you compete in any given market."

Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said that Fifth Third may be unable to make large purchases even if it has the appetite for them. "Their prior acquisitions in the Midwest and Florida have caused them pain," he said in an interview. "There is no simple way for them to earn their way out of this cycle. They're still playing catch-up with credit and they haven't caught up yet."

One more factor behind Fifth Third and other banks' thinking on capital deployment is the knowledge that, after five years, the cost of the Treasury-owned preferred shares jumps, with dividend payments rising to 9%, from 5%. Many companies plan to redeem the shares before the dividend rises, but doing so will mean finding capital elsewhere. And when capital markets will again be receptive to a bank offering is anybody's guess, Mr. Kabat said.

"The way the markets have acted, I don't believe anyone other than large banks making significant transactions have been able to tap the markets," he said. Asked when the markets might become more amenable to buying common stock, he said uncertainty holds sway. "My crystal ball gets foggy after 90 days."

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