September 30, 2008 – 11:45 am

Fifth Third Bank Corp’s share price was crushed 43 percent yesterday in what became the Dow’s bloodiest day in history.  It’s not that Fifth Third was singled out for decimation; it’s just that they have the misfortune of being another medium-sized bank on the food chain. In short, they’re addicted easy rollover credit, and at the beginning of the end of Ponzi financing, with starving banks like Wells Fargo on the prowl, that spells toast.

The best hope for many banks is for healthy institutions to snap up those that are struggling. Wells Fargo & Co., which has historically eschewed acquisitions, pored over the financial records of Wachovia and is now viewed as being on the prowl. Other regional players that are considered to be buyers are U.S. Bancorp of Minneapolis and PNC Financial Services Group of Pittsburgh. Representatives of Wells Fargo, PNC and U.S. Bancorp couldn’t immediately be reached for comment.

“Any bank with a halfway decent board has to take the initiative. It’s almost too late for some of them,” Mr. Wendel said.

Make that the only hope for many banks and the last hope for Fifth Third. The Bank has a litany of write-downs and distresses partially obscured behind the luster of high-gloss accounting.

By increasing loan loss provisions, Fifth Third says loud and clear that it thinks things will get worse. The ocean was pretty rough in the second quarter as the bank lost $202M. Compare that with net income of $376M in the corresponding period a year earlier. The bank’s write-downs and charge-offs ballooned to $344M as adoption of FAS 159 added an initial amount of $25 million to that expense.

In fact, elimination of FAS 159 was one of Treasury Secretary Paulson’s fondest measures. Is it any wonder that the stock cratered?

Finally, as if to serve notice that Fifth Third was indeed on life support, it had a downgrade left on its heaving chest as Wells Fargo got an upgrade.

Wells Fargo, on the other hand, has more than adequate capital to weather the current downturn, and the company’s credit rating should enable the company to raise capital to the extent that additional growth opportunities exist, the brokerage said.

The San Francisco-based bank will likely be able to generate meaningful revenue growth, which should drive above-average revenue and earnings growth and enable it to earn through the credit cycle, Baird added and raised its price target on the stock to $35 from $25.

Baird said Fifth Third, based in Cincinnati, Ohio, also has the earnings power and capital to likely earn through this cycle, but added that a prolonged period of sub-par economic growth could result in higher-than-expected credit costs. The brokerage cut its target on Fifth Third shares by $4 to $12.

And this is what we’ve come to: a Minsky Moment-esque point in time, where ability to sink into debt outweighs the ability to drive profits. “A prolonged period of sub-par economic growth could result in higher-than-expected credit costs.”  We all know what Minsky said about that weighted average.


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