NEW YORK (MarketWatch) — Fifth Third Bancorp
said Thursday it would take $68 million in charges to pre-tax income in its just-completed fourth quarter tied to a swap arrangement on Visa Inc.’s
class B shares.
The charge follows an announcement by Visa two weeks ago that it would set aside $1.6 billion to cover potential litigation losses, a move the credit-card processor said would dilute the value of class B shares.
Visa’s class B shares are held only by U.S. banks. The shares were set up to protect Visa’s class A holders against potential liability from lawsuits Visa and the banks faced. Visa puts its litigation reserves into an escrow account and the class B shares are diluted.
Fifth Third, which funnels sizable volume of credit card payments through Visa, used to hold a 4% stake but, like many banks, sold its B shares in 2009. The Cincinnati bank then entered into a total return swap agreement in which the bank will make or receive payments based on changes in the value of Class B shares.
On Thursday, Fifth Third said it expects Visa’s action to result in an increase the fair value of the swap liability — which triggers a loss on a bank’s balance sheet. It would be forced to pay its counterparty an extra $64 million in the first quarter, and that payment and change in value on its liabilities will reduce noninterest income by $54 million in the just-completed fourth quarter.
The bank will also increase its own litigation reserves for its membership in the card association by $14 million.
Analysts polled by Thomson Reuters expect the bank to earn $341.6 million in net income in the fourth quarter.
Fifth Third also took a $17 million charge tied to the class B shares in the third quarter.
Visa’s move means the litigation account has about $4.3 billion set aside to handle about 50 lawsuits filed since 2005. The suits, which also target MasterCard Inc. (MA), are from merchants who argue the card processors have violated antitrust laws by fixing the fees retailers pay to accept their cards. The suits also name large banks.
A trial date for the cases, which have been consolidated in U.S. District Court for the Eastern District of New York, has been set for September 2012, but analysts have speculated a settlement is likely to occur before then.
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