Earnings Preview: Fifth Third Bancorp

OVERVIEW: Like nearly every other bank, Fifth Third is facing mounting problems because of rising defaults in its mortgage portfolio. In June, the Cincinnati-based bank announced plans to raise fresh cash through the sale of stock and assets and reduce its dividend in an attempt to shore up its capital base in the face of mounting mortgage and loan losses.

Fifth Third raised $1 billion through the issuance of convertible preferred stock, raised an additional $1 billion through the sale of assets and said it is slashing its dividend by nearly two-thirds to 15 cents from 44 cents.

In moving to improve its capital position, Fifth Third blamed the problems on the U.S. housing and credit crisis that has battered the financial sector, hitting particularly hard in key Fifth Third states such as Ohio, Michigan and Florida.

BY THE NUMBERS: Analysts polled by Thomson Financial, on average, forecast a loss of 10 cents per share during the second quarter on revenue of $1.58 billion. Analysts do not always include special one-time charges in their estimates.

ANALYSTS' TAKE: Lehman Brothers analyst Jason Goldberg said he expects Fifth Third to earn 5 cents per share for the quarter. Goldberg said his estimate excludes a potential charge of 46 cents per share tied to leveraged leases.

The estimate is based on rising charge-offs on its loan portfolio, Goldberg wrote in a research note. Goldberg anticipates Fifth Third will set aside between $700 million and $725 million to cover loan losses during the quarter.

Charge-offs are loans banks write off as not being repaid.

Goldberg also anticipates net-interest margins--the profit margin from lending--will improve to 3.45 percent from 3.41 percent in the first quarter.

WHAT'S AHEAD: Fifth Third said it expects charge-off levels among loans to continue to rise into 2009, forcing it to set aside even more capital to cover losses due to the downturn in the mortgage and real estate markets.