Fifth Third Bancorp said Wednesday it expects charge-offs to continue to rise through 2009, which will in turn force the bank to set aside more cash to cover the losses.
As a result, Moody's Investors Service placed the bank's long-term deposit and debt ratings on review for a potential downgrade as it expects further deterioration in the bank's risk-adjusted profitability and additional weakening in credit quality.
"Fifth Third's profitability and efficiency are likely to remain below our expectations because, in Moody's opinion, spreads on its loan portfolio will remain tight and provisions for loan losses will grow in the foreseeable future," says Moody's analyst Peter Routledge.
To combat ongoing deterioration in its loan portfolios and to shore up its capital base, Fifth Third plans to raise $1 billion through the sale of preferred stock and at least another $1 billion through the sale of certain assets. Moody's said the capital-raising efforts will strengthen the bank because it will help offset increased loss provisions and help the bank maintain "solid capital ratios" – at least in the short term.
Fifth Third's footprint includes some areas - such as Ohio, Michigan and Florida – hit hard by rising defaults among mortgages and other types of loans, which will lead to a further rise in nonperforming assets and charge-offs. Charge-offs are loans written off as not being repaid.
Fifth Third currently carries a bank financial strength rating of "B+" and a bank deposits rating of "Aa2."