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Fifth Third (FITB) to Gain $9 Million Post Vantiv Stake Sale

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Fifth Third Bancorp FITB is likely to recognize a pre-tax gain of approximately $9 million (around $6 million after-tax) in fourth-quarter 2016, from the partial sale of its stake in Vantiv Inc. VNTV. The bank will also record about 4 basis points expansion in its Common Equity Tier 1 ratio.

Notably, Vantiv has initiated a new secondary offering of 4.8 million shares of its Class A common stock, sold on behalf of Fifth Third. Further, Vantiv will also buy back 0.85 million shares of Vantiv Class A common stock from Fifth Third. Therefore, following these transactions, Fifth Third would hold around 17.9% of Vantiv’s equity through its ownership of about 35 million Class B units of Vantiv Holding, LLC.

Stake Sale in Detail

The current sale of 5.65 million shares by Fifth Third were acquired by the bank through the net exercise of residual warrants in Vantiv Holding, LLC and the exchange of Vantiv Holding, LLC units for Class A shares of common stock held in Vantiv, Inc. Notably, due to the warrants holding, Fifth Third had the right to purchase about 7.8 million Class C units at a $15.98 strike price. Therefore, these were met through the net issuance of recent 5.65 million units.

Exercise of warrants and sale of Vantiv stock reflects Fifth Third’s target of monetizing its remaining stake in Vantiv. Moreover, this move will help Fifth Third in reducing volatility in earnings as it eradicates fair value adjustments associated with the warrants.

“We continue to take a deliberate and thoughtful approach to reducing our ownership interests in Vantiv,” stated Greg Carmichael, Chief Executive Officer of Fifth Third. “Since the sale of a majority interest in Vantiv in 2009, the warrant position has generated approximately $528 million in after-tax value for Fifth Third’s shareholders.”

Following these transactions, as per the Tax Receivable Agreement, Vantiv might have to bear a liability of about $175 million, associated with the cash payments payable to Fifth Third over the next 15 years.

On completion of the transactions, only one director can be appointed by Fifth Third to Vantiv’s board of directors, instead of two. Therefore, Vantiv is expected to decrease the number of directors to 11, with the assumption of resignation of one director of Fifth Third.

The Back Story

U.S.-based Vantiv – formerly known as Fifth Third Processing Solutions (FTPS) – is a payment processing company, dealing with more than 12.9 billion payment transactions, valued at $426 billion annually.

Fifth Third had spun-off FTPS in 2009, following a joint venture that was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in Jun 2011. Notably, Vantiv Inc. had opted for an initial public offering of Class A shares of the company. The offering was completed on Mar 21, 2012.

Our Viewpoint

Any measures that would aid in optimizing the balance sheet and share buybacks are encouraging and represent an efficient use of funds. Such initiatives would help create value for shareholders.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovery in the economy of regions where it has a footprint. Moreover, the company’s efforts in reducing its non-performing assets and operating expenses will serve as catalysts for growth. Further, we believe that its capital deployment activities will boost shareholders’ confidence.

However, a persistent low interest-rate environment, regulatory issues as well as competitive pressures remain headwinds.

Fifth Third currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

The Bank of New York Mellon Corporation BK, with a Zacks Rank #2, has been witnessing upward estimate revisions for the last 30 days. So far this year, the company’s share price has been up more than 18.2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comerica Incorporated CMA has been witnessing upward estimate revisions for the last 30 days. Further, the stock has risen over 48.6% so far this year. It currently holds a Zacks Rank #2.

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