Each 10 basis-point reduction in debit card interchange rates will cost Fifth Third Bancorp about $15 million annually in interchange revenue, Dan Poston, Fifth Third chief financial officer, told analysts during a conference call yesterday to discuss second-quarter earnings, referring to new rates the Federal Reserve Board would determine under a mandate outlined in the new financial-reform law.

“That’s before any steps that we would take in mitigation, and we do believe that much of this could be mitigated over time as we and our customers adapt to whatever rules are written,” he said,

The bank earns about $200 million annually in debit interchange revenue, Poston said.

Poston acknowledged during the call that it is too soon to determine what the actual impact would be on revenue, in part because he, like others in the industry, is unsure what costs the Fed would take into account when determining interchange rates for debit card transactions.

“There’s going to be lots of opportunity to mitigate whatever that impact is, once we know how the rules are set and (we know) the challenge that’s laid out in front of us,” he said. “So, on an overall basis, we would anticipate that it will be far less significant than what some others may have been estimating.”

Charles Noski, executive vice president and chief financial officer at Bank of America Corp., the nation’s largest debit card issuer, told analysts during a conference call last week to discuss second quarter earnings that BofA could lose in annualized revenue before mitigation as much as $1.8 billion to $2.3 billion in debit-interchange revenue, starting in the third quarter of 2011 (see story). 

Poston, however, expressed less skepticism.

“We obviously expect rates to come down; that’s what the legislation intends,” he said, noting, however, that he doubts the Fed would set rates so issuers lose money offering debit card services. “That’s what pricing at marginal costs would do, and that certainly wouldn’t seem reasonable and proportional. No one would benefit from that kind of disruption in the debit services that that would cause. Not us, not consumers, not even major retailers. The Fed’s study will highlight the pros and cons of the legislation, which will be used in determining the appropriate interchange rates. Until all of that takes place, we don’t really know what we’re dealing with.”

 (Fifth Third’s 2009 second-quarter earnings data reflect a pretax gain of $1.76 billion related to the sale of its processing business to Advent International Corp., which in the deal secured a 51% interest in Fifth Third Processing Solutions (see story). 

Card and processing volume during the second quarter ended June 30 totaled $84 million, up 15.1% from $73 million the previous quarter but down 65.4% from $243 million during the same period last year. Last year’s second-quarter results included $169 million in merchant-processing and financial institutions revenue that transitioned with the processing-business sale. Excluding the divested revenue, card and processing revenue increased by 14% from last year’s second quarter, driven by growth in transaction volume, Fifth Third reported.

Credit card losses charged off during the quarter totaled $42 million, down 6.7% from $45 million during the same period last year and down 4.5% from $44 million during the first period. The net card charge-off rate during the quarter was 9.05%, up 24 basis points from 8.81% a year earlier but down 18 basis points from 9.23% during the first quarter.

Average credit card loans during the quarter totaled $1.86 billion, down 6% from $1.98 billion during the year-ago period and down 4.1% from $1.94 billion during the first period. Card loans 90 days or more past due totaled $46 million, down 28.1% from $64 million a year earlier and down 19.3% from $57 million during the first period.

As a company, Fifth Third reported second-quarter net income of $192 million, down 78.2% from $882 million during the same period last year but an improvement from a $10 million first-quarter loss. Revenue totaled $1.51 billion, down 55.8% from $3.42 billion during the year-ago period and down 1.3% from $1.53 billion during the first period.

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