December 9, 2008 / 11:18 AM / 10 years ago

UPDATE 1-Fifth Third faces higher loan losses: analyst Bove

Dec 9 (Reuters) - Veteran banking analyst Richard Bove said a turnaround at Fifth Third Bancorp (FITB.O) was still a few quarters away, and that the large U.S. Midwest regional bank may suffer sequentially higher loan losses in the fourth quarter due to its exposure to the struggling U.S. automakers.

“The problems with the automobile manufacturers imply that loan losses in 2009 could be higher than in 2008,” the Ladenburg Thalmann analyst wrote in a note to clients.

“Even if the auto companies are bailed out, they are going to shrink further causing more disruption in Fifth Third’s markets,” said Bove, who cut his 2008 and 2009 earnings estimates for the bank.

The fate of the U.S. auto industry and millions of jobs are on the line as major players work out details on Tuesday of a plan to extend emergency loans to the Big Three automakers in exchange for tougher oversight.

Analyst Bove, however, said the bank was improving its operations outside of the loan losses it continues to absorb.

Fifth Third is likely to sell $3.46 billion in new preferred stock to the Treasury under the U.S. government’s Troubled Asset Relief Program (TARP), Bove said.

The TARP program, originally worth $700 billion, is intended to shore up the balance sheets of financial firms hit by the mortgage market meltdown and ensuing credit crisis.

Fifth Third has also opted into the Federal Deposit Insurance Corp’s (FDIC) guarantee program, and is likely to issue bonds backed by FDIC insurance at some point in the next six months, he added.

“Based on these new capital injections, the bank is likely to be able to leverage its balance sheet to make more loans,” Bove said.

The analyst cut his earnings estimates for the bank to 11 cents from 16 cents a share for 2008, and to 77 cents from 94 cents a share for 2009.

He cut his price target to $11 from $15, but still rates the stock “neutral.”

Shares of Fifth Third closed at $8.33 Monday on Nasdaq. (Reporting by Tenzin Pema in Bangalore; Editing by Deepak Kannan)

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