Saturday, March 29, 2003

Analysts differ on whether 5/3 is cleared to acquire

By Jeff McKinney
The Cincinnati Enquirer

Wall Street analysts Friday were still raising questions about how Fifth Third Bancorp's agreement with government regulators will allow the Cincinnati banking giant to resume acquisitions in the near future.

Some analysts think that the settlement by the parent of Fifth Third Bank will allow the company to continue to pursue mergers or acquisitions if it chooses. Others want more clarity.

The questions come after Fifth Third agreed with the Federal Reserve Bank of Cleveland and the Ohio Department of Financial Institutions to take steps to strengthen the bank's risk management processes, accounting issues and internal controls. The agreement came as the result of an investigation sparked by the company's announcement in November that accounting errors reduced third-quarter profits by $54 million.

The agreement will force the company to do things such as hire a consultant to oversee most of its operations and to submit written policies tied to its risk management and accounting procedures.

But the Fed agreement does not provide any clear direction on whether Fifth Third will be able to make more acquisitions, key to its earnings and revenue growth the past decade. A letter that the Fed issued last fall imposed a moratorium on future acquisitions.

Fifth Third officials have declined to discuss the issue, noting that the later settlement was "silent on the matter" of acquisitions.

In trading Friday, Fifth Third stock was down $1.61 to $51.46 a share, after having gained $1.27 the day before.

"We await more clarity on the M&A front ..." Jason Goldberg of Lehman Brothers in New York wrote in a report released Friday. "While the (written agreement) does not appear to replace restrictions on growth, it does not mention acquisitions."

Yet, another camp of analysts figures that because the agreement does not mention mergers or acquisitions, it removes the prohibition put on by the letter.

That is the opinion of Jennifer Thompson, a top banking analyst at Putnam Lovell NBF Securities Inc. in New York. If that is the case, Thomson, like many other banking analysts, thinks Fifth Third likely won't soon pursue acquisitions until the company complies with terms of the written agreement.

"Management has indicated that it would not submit any application to the Fed in terms of future acquisitions until the terms of the agreement have been satisfied," Thompson wrote in a report issued Friday.

Fifth Third revealed the accounting problem in a regulatory filing. The problem involved bookkeeping errors on investments through the bank's treasury operations

Joseph Stieven of Stifel Nicolaus & Co. in St. Louis said many analysts are overreacting on the acquisition point.

"Acquisitions have been a tool, but not the fuel driving the engine,'' he said. "The real fuel driving the engine has been internal growth via successful and aggressive marketing that has increased market share and profitability in the cities where they operate."


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