FITB Fifth Third Bancorp

By Lisa Beilfuss 

Fifth Third Bancorp became the latest bank to take a charge related to tumult in the secondary market for student loans.

The Cincinnati-based bank on Tuesday said it charged off $102 million when it restructured a commercial loan that is backed by private student loans. Fifth Third attributed the move to the changing economics of student lending.

Fifth Third said the write-down was on a $500 million loan the bank gave an unspecified student lender in 2007. The bank expected the borrower to securitize the loans and use the proceeds to repay Fifth Third, but that didn't happen.

The bank blamed problems in the secondary market for these loans when explaining the markdown on an earnings call.

"This credit is backed by private student loans. And as you know, during the quarter, volatility in the student-loan markets caused significant stress on the valuation of underlying student loans," Fifth Third Chief Financial Officer Tayfun Tuzun said on a call with investors.

Student lending has grown rapidly in recent years but is now largely done by the government. Meanwhile the markets for student loans originated by banks or other private lenders have faced hiccups since the financial crisis.

This summer, the issuance of bonds backed by older federal student loans that were originally given out by private lenders came to a halt on worries about possible downgrades. Those issues are now rippling out into other types of loans.

In the market for private student loans--like those mentioned by Fifth Third--it has become more expensive for companies to issue bonds in recent months.

Since late July, the average spread--defined as the yield investors are demanding to buy the bonds over the London interbank offered rate benchmark--has widened by 0.28 percentage point on private student-loan bonds with the highest credit ratings, according to Interactive Data, a New York-based firm that provides fixed-income evaluations.

At the time when Fifth Third made this loan, it was common for private student lenders to take out large commercial loans from banks to finance the loans they made, said Mark Kantrowitz, a student-lending expert. While this secondary market for private loans froze during the financial crisis, it isn't entirely clear why the unnamed student lender wouldn't have securitized the loans when markets rebounded, he said.

"We don't control whether the loans are securitized," a Fifth Third spokesman said. "The decision to continue to service this portfolio, or to pursue securitization, would be the decision of our borrower."

The bank had already set aside some money for the write-off, but took a $35 million pretax provision for the student-loan-related restructuring in the third quarter, dragging down Fifth Third's profit.

The bank reported a profit of $381 million for the quarter, up from $340 million a year earlier but falling short of Wall Street projections.

Analysts were surprised by Fifth Third's disclosure and said questions remained about the situation.

"I was sort of caught off guard by the exposure," said Scott Siefers, a bank analyst at Sandler O'Neill. "This is an issue that is almost a decade old. The fact it's rearing its head again in this indirect way is certainly a surprise."

U.S. Bancorp recently faced a similar issue with the student-loan market. In September, U.S. Bancorp said it dropped an effort to sell a $3 billion portfolio of student loans because the bids were too low. It took a write-down of $58 million, reflecting the diminished value of those assets.

U.S. Bancorp stopped making new student loan originations in 2012, but continues to own student loans made under the Federal Family Education Loan Program, or FFELP.

The bank was seeking to free up capital for other purposes in its recent sales effort. "The market broke," U.S. Bancorp Chief Executive Richard Davis said at an investor conference last month.

Federal student-loan bonds are at risk of defaulting because a rising number of borrowers are either delaying payments or entering programs to lower their monthly payments. This lessens the chances that the loans will be paid in full by the time the bonds mature.

Though these options are not as widely available with private student loans, investor concern about liquidity has toppled over to private student-loan bonds, said David Varano, a fixed-income analyst with Interactive Data. Concerns over the Chinese economy and stock market volatility in the U.S. during the summer also contributed to the spike in spreads for many asset-backed securities, he said.

Unlike federal student loan securitizations, the private student-loan bond market remains active. There were $4.25 billion in private student loan securitizations so far this year, up 48% from the same period a year prior, according to Moody's Investors Service. "Issuance in the private student loan [securitization] market is not generally affected by the [federal securitization] market," said Nicky Dang, a vice president at Moody's. "We expect more issuance this year."

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

October 20, 2015 19:12 ET (23:12 GMT)

Fifth Third Bancorp (NASDAQ:FITB)
Historical Stock Chart
From Mar 2024 to Apr 2024

Fifth Third Bancorp (NASDAQ:FITB)
Historical Stock Chart
From Apr 2023 to Apr 2024