July 22, 2008 – 4:54 pm

Banks implode overnight and reveal their long-standing failed status. Many would like us to believe that they fail overnight, but in reality, they fail over time. When certain events transpire, the significance of which will only be discerned too late, a bank’s status becomes apparent. One example is the change of a key long term trend:

Fifth Third Bancorp, Ohio’s second- largest bank, posted its first loss in at least nine years as the lender set aside more money to cover bad debts in distressed housing markets including Florida and Michigan. The net loss was $202 million, or 37 cents a share, compared with a profit of $376 million, or 69 cents, in the same period a year earlier, the Cincinnati-based company said today in a statement.

For most banks, the earnings worm spoiled the cart last year when the credit bubble burst, but Fifth Third was somehow able to maintain positive earnings until now. Other tell tale signs of impending bankruptcy continue piling up. Witness:

The bank increased its provision for loan losses, or money set aside to cover bad loans, to $719 million, nearly six times the $121 million set aside in the same period last year.

Net charge-offs, or loans written off as not being repaid, more than tripled to $344 million from $102 million in the 2007 quarter. Non-performing assets also tripled, to $407 million from $136 million.

“Deteriorating credit trends remain disproportionately attributable to commercial and residential real estate loans, particularly in Florida and Michigan, and we continue to be very active in taking steps to address these issues that we and the industry are facing,” said Chairman and Chief Executive Kevin T. Kabat in a statement.

Insolvency lingers within those deteriorating credit trends, and tricks that once worked for other banks are no longer viable. The market has made clear that time is not on their side.

With losses and write-downs mounting, Fifth Third Bancorp is taking actions that boldly state it’s just a matter of time before investors no longer answer your rights placements; just a matter of time until depositors seek higher yields; just a matter of time before large institutions sell the bank off and then sell short.

Maybe he saw what happened to HBOS, but new CEO Kevin Kabat is mum about the banks cash-raising intentions:

On June 18, Fifth Third announced that it would raise about $1 billion in capital through preferred stock, cut its quarterly dividend by 66% to 15 cents a share, and that it would raise another $1 billion through the sale of non-core businesses.

During the conference call with investors Tuesday, Kabat said, “We can’t and won’t comment in any greater detail on what these businesses are or are not other than to say that the decision to sell assets is strategic and contemplated for sometime.”

With the mother of all credit crunches setting in like concrete the inevitable break of the nine year positive earnings streak is more than a one time event. It’s a bad omen.


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