Fifth Third likely to convert preferred shares Business Courier of Cincinnati - by Steve Watkins Staff Reporter Tuesday, May 12, 2009, 11:37am EDT As other banks launch public stock offerings to raise capital, donât hold your breath for a similar Fifth Third Bancorp offering. Fifth Third isnât saying how it will raise the $1.1 billion in capital the federal government says it needs. But it pointed to several options including converting some preferred stock into common shares to boost its capital to acceptable levels. The Federal Reserve released a report May 7 specifying how much more capital the nationâs 19 largest banks need. The study is based on those banksâ ability to handle a worsening economic scenario. The Fed determined Fifth Third (NASDAQ: FITB) would need $1.1 billion more common capital than it now has if the economy slumps further than expected. That figure takes into account the $1.2 billion in capital Fifth Third expects to raise from the sale of 51 percent of its payments processing unit. That deal is expected to close in the second quarter. Before the planned sale and other first-quarter actions, Fifth Third would have had to raise $2.6 billion. The $1.1 billion Fifth Third needs to raise for the stress tests is the second-lowest among the 10 banks that the government said need to raise money. The U.S. Treasury is making capital available to banks that canât raise enough to meet the stress test requirements. But Fifth Third doesnât expect to need that help. âWe expect to meet this new commitment to further reinforce our capital composition within six months through additional private market actions,â Fifth Third CEO Kevin Kabat said in a news release. âWe do not expect to further utilize government capital programs.â That likely points to converting private preferred stockholders to common stock. Fifth Third raised $1 billion in June by selling preferred shares to the public. Morningstar Inc. analyst Maclovio Pina said in a report that he expects Fifth Third to raise money by converting preferred stock. Even though that stock is convertible at $11.58 per share â more than $3 above the current price â shareholders might be willing to convert at a lower price, Pina said. He also expects Fifth Third to raise more than the $1.1 billion it needs. âSo, in addition to the convertible preferred, Fifth Third could raise more common equity,â he wrote. âThis could amount to between $300 million and $500 million. From our calculations, these two transactions could imply a 20 percent to 30 percent dilution for current shareholders.â Thatâs about what Pina had estimated before the stress test results came out. Fifth Third said in the release that its options to raise capital include the potential sale of some non-strategic assets, such as common stock it owns in publicly traded companies with unrecognized gains. That also could include converting some of its existing securities. It further mentioned selling available-for-sale securities in which it has gains as a possible capital source. Fifth Thirdâs options expanded when its stock surged in recent weeks. It closed at $8.35 Monday and jumped $3.14, or 59 percent, Friday after the stress test results were released the prior afternoon. That makes a public offering more lucrative than it would have before the stock rose. When the stock was in the doldrums below $2 in February and March, it would have been practically impossible to raise significant amounts of money by selling stock. Kabat said at the companyâs annual shareholders meeting April 21 that the bank holding company wants to pay back government money as soon as possible. It received that $3.5 billion through the governmentâs Troubled Asset Relief Program. Banks that need to raise capital as a result of the stress tests have to come up with a detailed plan within 30 days. They have six months to raise the capital. Bank of America Corp. (NYSE: BAC), KeyCorp (NYSE: KEY), Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have all said they will sell common stock to the public to raise the necessary capital required by the stress tests. BMO Capital Markets and Morgan Keegan each raised their investment rating on Fifth Thirdâs stock after the stress-test results were released. Kabat said in the release he doesnât expect the banking environment to approach the adverse scenarios included in the stress tests. Its capital and loan-loss reserves should allow it to âabsorb even the high and conservative level of loan losses assumed under the (stress tests),â he said. âWe donât expect loan loss rates to approach those levels. Our recent results and current expectations for the second quarter are significantly better than those assumed for those periods under the more adverse scenario. These near-term results and expectations provide a good starting point for the future level of our capital in later periods. We are confident that our capital levels will remain above levels required by regulatory authorities and our own targets.â Fifth Third, headquartered in Cincinnati, is the Tri-Stateâs largest bank, and has 16 affiliates with about 1,300 banking centers and more than 2,300 ATMs in Ohio, Kentucky, Indiana, Georgia, North Carolina, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, and Missouri.