On Wednesday, Fifth Third Bancorp (FITB) announced that according to a notice issued by the company to the trustee of Fifth Third Capital Trust VII on May 16, 2011, the 8.875% trust preferred securities (TRUPs) should be redeemed by June 15, 2011. As per Fifth Third, each Trust Preferred Security will be redeemed at cash redemption price of $25.18.
The certificates related to TRUPs are dated May 6, 2008 and represents 16,000,000 8.875% Trust Preferred Securities of Fifth Third Capital Trust VII worth $400 million to be redeemed. The redemptions will be funded with excess cash currently available with Fifth Third.
TRUPs were listed on the New York Stock Exchange (NYSE) under the trading symbol FTBPRC. On May 17, 2011, NYSE was informed about the redemption, whereas a day after Fifth Third filed a report on Form 8-K related to the redemption notice with the Securities and Exchange Commission (SEC). Therefore, NYSE halted the trading in this security shortly after this Form 8-K was filed and did not resume until a new trading symbol, FTBPRCCL, was assigned on May 19, 2011.
Moreover, Fifth Third announced to compensate those investors, who paid more than $25.18 per security purchasing after 2:16 p.m. ET on May 16 and before trading in the securities was halted on May 18. Further, if the buyer purchased the security over two-day period and later on sell it, Fifth Third will only compensate investors for the amount they lost. Fifth Third expects the total compensation payments to be within $1.5 million.
Fifth Third has voluntarily taken up such initiatives to retain the trust and interest of its investors while also regretting for the inconvenience caused resulting from the notification process involved with this redemption.
As per applicable regulatory capital guidelines issued by bank regulatory agencies, upon notice of redemption, the trust preferred securities will be phased out as a component of Tier 1 capital for Fifth Third. The Dodd-Frank Act stated that TRUPs will not be included as a part of Tier I capital beginning January 1, 2013. As of March 31, 2011, Fifth Third's Tier I capital included $2.8 billion of trust preferred securities.
In January 2011, Fifth Third submitted a capital plan to the Federal Reserve Board under the Federal Reserve’s Comprehensive Capital Analysis and Review, including dividend hike, common stock repurchases and redemption of certain trust preferred securities. In March 2011, Fifth Third got Fed’s approval of dividend hike, stock buyback and redemption of certain trust preferred securities, after the completion of stress tests to assess the banks’ financial position.
Fifth Third was one of the 19 banks that were subjected to "stress tests" conducted by the Federal Reserve. Due to the recession, Fed had put restrictions on increasing the banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started exerting pressure on the regulators for restoring their dividends.
These banks, including big names such as JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC)and Citigroup Inc. (C), needed to show that they had adequate capital to address potential losses over the next two years under various scenarios.
Following the approval, Fifth Third’s board of directors increased the cash dividend to 6 cents per share on its common stock. First-quarter 2011 cash dividend of 6 cents represents an increase of 5 cents from Fifth Third's previous quarterly dividend of 1 cent, up by 500%. The increased dividend was paid on April 21 to shareholders of record as of April 1.
The strength of Fifth Third’s business model reflects the company’s commitment to return value to shareholders with its strong cash generation capabilities.
We are encouraged to see the credit management efforts of Fifth Third and expect the company to experience an improvement in credit quality in the upcoming quarters. Though challenging economic conditions along its footprint and the recent regulatory issues are expected to remain an overhang, going forward, we expect Fifth Third’s diverse revenue stream, opportunistic expansions and cost containment measures to support its earnings.
Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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