Fifth Third to Redeem $575M TruPS

Zacks

Earlier this week, Fifth Third Bancorp (FITB) joined the bandwagon of major financial institutions and announced the redemption of trust preferred securities (TruPS) worth $575 million. These include the redemption of 7.25% TruPS issued by Fifth Third Capital Trust V. Over the last couple of weeks, banks have been redeeming TruPS since these will no longer qualify for Tier 1 capital ratio calculations beginning 2013.

Fifth Third stated that these preferred securities will be redeemed at $25 per trust preferred share. The redemption amount will also include accrued and unpaid distributions until the redemption date arrives.

The TruPS redemption will take place on August 15, 2012, with Wilmington Trust Company, a subsidiary of M&T Bank Corporation (MTB), as the paying agent.

Fifth Third’s decision to redeem TruPS follows the announcement of the new capital rules by the Federal Reserve in June 2012. As per the new proposal, the TruPS issued prior to May 19, 2010 would not be considered for the calculation of Tier 1 capital ratio.

Similar Actions

Apart from Fifth Third, many other banks have announced the redemption of TruPS in the last few weeks. TCF Financial Corporation (TCB) announced the redemption of $115 million in TruPS, Bank of America Corporation (BAC) announced the redemption of $3.9 billion in TruPS, BB&T Corporation (BBT) announced the redemption of $3.1 billion in TruPS, while JPMorgan Chase & Co. (JPM) would be redeeming nearly $9 billion in TruPS.

Further, SunTrust Banks Inc. (STI) stated that it will be redeeming TruPS worth nearly $1.19 billion. Citigroup Inc. (C), whose extra capital deployment request was rejected by the Fed, has also announced the redemption of TruPS.

Conclusion

TruPS redemption is viewed as a positive step for the banks, enabling them to bring down interest expenses, as these securities demand higher rates than other securities and often the banks replace TruPS with equity or other low-cost debt. Further, according to the Dodd-Frank Act, banks will no longer be able to consider these securities as regulatory capital beginning 2013.

Fifth Third recently bought back shares worth $75 million, according to its filing with the Securities and Exchange Commission. The share buybacks were made as per the regulatory approval that the company received in March and were supported by the realized gains from the Vantiv IPO.

Notably, according to the 2012 stress test results, Fifth Third was allowed to make this share buyback from the gains of the Vantiv IPO, formerly Fifth Third Processing Solutions, LLC. Moreover, the company got the permission to continue its quarterly common dividend at 8 cents per share and redeem up to $1.4 billion in certain TruPS.

We believe that with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy. Its traditional commercial banking franchise and solid market share in key markets will bode well going forward. However, regulatory issues and competitive pressures are the headwinds for the stock.

Fifth Third currently retains a Zacks #3 rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.
 

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