FITB

Fifth Third Bancorp (FITB)

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Fifth Third Bancorp (FITB)

Q1 2009 Earnings Call

April 23, 2009; 8:30 am ET

Executives

Kevin Kabat - Chairman and Chief Executive Officer

Ross Kari - Chief Financial Officer

Mary Tuuk - Chief Risk Officer

Dan Poston, Controller

Mahesh Sankaran - Treasurer

Jim Eglseder - Investor Relations

Jeff Richardson - Investor Relations and Corporate Analysis

Analysts

Betsy Graseck - Morgan Stanley

Brian Foran - Goldman Sachs

Mike Mayo - Deutsche Bank

Presentation

Operator

Good morning. My name is Takiya and I will be your conference operator today. At this time, I would like to welcome everyone to the Fifth Third first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Richardson, you may begin your conference.

Jeff Richardson

Thanks, Takiya. Hello and thanks for joining us this morning. We will be talking to you today about our first quarter 2009 results. This call may contain certain forward-looking statements about Fifth Third Bancorp pertaining to our financial condition, results of operations, plans and objectives. These statements involve certain risks and uncertainties. There are a number of factors that could cause results to differ materially from historical performance in these statements.

We have identified a number of those factors in our forward-looking cautionary statement at the end of our earnings release and other materials and we encourage you to review those factors. Fifth Third undertakes no obligation and would not expect to update any such forward-looking statements after the date of this call.

I am joined here in the room by several people. Kevin Kabat, our Chairman and CEO, Chief Financial Officer, Ross Kari, Chief Risk Officer, Mary Tuuk, our Controller, Dan Poston, our Treasurer, Mahesh Sankaran, and Jim Eglseder of Investor Relations. During the question-and-answer period, please provide your name and that of your firm to the operator.

With that I’ll turn the call over to Kevin Kabat., Kevin.

Kevin Kabat

Good morning, everyone, and thanks for joining us. There is a lot going on in the industry right now and I would like to address the impact of some of those macro issues to Fifth Third. I will also provide some highlights for the quarter before turning things over to Mary and Ross for a more detailed look at our financial performance.

The major development in the quarter for Fifth Third was our announcement that we plan to sell 51% of our processing business to Advent International. The transaction values the business at $2.35 billion before about $50 million in valuation adjustments. This transaction brings us a partner to co-invest in a business that we believe has significant additional growth opportunities.

And Advent’s substantial expertise in the payment space, particularly internationally will be beneficial as well. Additionally, we expect the transaction to generate a pre-tax gain of approximately $1.7 billion, a net income of nearly $1 billion dollars. Tier 1 and TCE ratios would increase by over 90 basis points and tangible book value per share would increase about $2 per share to $10.80 on a pro forma basis.

In terms of the economic environment, for most of the past 18 months, it’s been a pretty steady drumbeat of negative news and developments, and things aren’t going to change immediately. However, recently we’ve seen a few signs that may be signaling that the rate of deterioration may be beginning to slow. The rate of new unemployment claims just dropped, housing inventories are beginning to come down in a few markets, and the housing affordability index has improved significantly over the past several months. Mortgage re-financings are high, increasing discretionary spending power.

We saw an improvement in year-over-year processing revenue growth after several slowing quarters, and we expect that to continue, so consumers may be showing some signs of life. So, while economic conditions are likely to remain challenging near term, there are some reasons for modest optimism regarding the outlook relative to the past four or five quarters.

Now let’s take a look at operating results for the quarter. We reported net income of $50 million, compared with a net loss last quarter of $2.1 billion. Last quarter’s results included a goodwill charge of $965 million, approximately $800 million of charge-offs associated with the credit actions that we took, and a $700 million reserve bill. Including preferred dividends, this quarter’s net loss attributable to common shares was $26 million or $0.04 per share.

Results this quarter included a resolution of our leveraged lease litigation. We’ve also effectively put potential negatives related to the BOLI issue behind us, as the residual market value exposure is now about $20 million. Coupled with our credit actions last quarter and our continued efforts to work out for restructured troubled loans, we’ve been working very aggressively to deal with problems and get them resolved.

As you’d expect from Fifth Third, we are aggressively managing our expenses in this environment. During the quarter, our core expenses were reduced by 9%, as we remain focused on optimizing our resources. We also continue to reallocate personnel to areas such as mortgage modifications, our troubled debt restructuring group, and the commercial special assets group. We had continued strong momentum in deposits, average core deposits were up $2.4 billion sequentially or 4%, with average demand deposits up nearly $1 billion or 6%.

Our Everyday Great Rates philosophy remains intact. We continue to offer competitive rates, but do not seek to be the market leader. DDA account production remained strong during the quarter with net new consumer accounts more than doubling from fourth quarter production.

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