June 18 (Bloomberg) -- Fifth Third Bancorp fell 27 percent, the most in more than 25 years, after slashing its dividend and forecasting that most of the company's quarterly profit will evaporate.

Earnings may be as little as 1 cent to 5 cents a share in the second quarter excluding additional charges, Ohio's second- biggest bank said in a regulatory filing today. Analysts surveyed by Bloomberg had predicted an average of more than 40 cents. Fifth Third will sell subsidiaries and preferred convertible stock to raise $2 billion, the company said.

Fifth Third follows Ohio's two other largest banks, National City Corp. and KeyCorp, in raising cash. U.S. lenders may need an additional $65 billion as losses and writedowns extend into 2009's first quarter, Goldman Sachs Group Inc. analysts said yesterday. Fifth Third is vulnerable because it operates in states where borrowers are having the hardest time keeping up with payments.

``What's going wrong for them is that they have this position in Michigan and Florida, so they're astride some consumer industries, housing and auto, that are showing the greatest degree of stress,'' said Dick Bove at Ladenburg Thalmann & Co.

Fifth Third fell $3.47 to $9.26 a share at 4 p.m. in New York Stock Exchange composite trading, and earlier touched $9.23. It was the biggest loser in the Standard & Poor's 500 stock index. Fifth Third has posted nine quarters of lower profit, including a 19 percent drop in January through March this year. The lender has plunged 78 percent in 12 months.

Uncollectible Loans

The cost of uncollectible loans in 2009 will rise from this year, and the bank will need to hold more money in reserve, with a second-quarter provision of $700 million to $725 million. The quarterly dividend was slashed to 15 cents a share from 44 cents, making Fifth Third the 17th company to cut or eliminate its payout this year.

The bank slashed the dividend ``in light of our expected levels of earnings over the near-term and the benefits of building capital at a higher pace during this part of the current credit and economic cycles,'' Chief Executive Officer Kevin Kabat said in a statement.

Kabat is taking over as company chairman, Fifth Third said. George A. Schaefer Jr., 63, retired yesterday as planned, the bank said. James Hackett was named lead director.

Fifth Third, which operates branches in 12 states, traces its roots to 1863, when Cincinnati businessmen opened Third National Bank inside a Masonic temple, Hoover's Inc. said. Eight years later, it bought Bank of the Ohio Valley, and continued expanding through acquisitions.

In addition to banking, the lender has businesses that deal with car leasing, insurance and mortgage reinsurance.

Tier 1 Ratio

Fifth Third said the funds would raise its Tier 1 capital ratio to 8.5 percent, above the regulatory minimums. The new estimate excludes a potential $250 million charge the lender might be forced to take as a result of losing a tax case tied to how the company accounted for leasing transactions.

Loans that Fifth Third doesn't expect to be paid back may total $340 million to $350 million, the lender said in the filing. Nonperforming assets in the second quarter will be 40 percent to 45 percent higher than the first quarter, Fifth Third said.

Fifth Third joins the list of banks and securities firms that have raised more than $300 billion to shore up their balance sheets after losses tied to mortgage and debt markets. Philadelphia-based Sovereign Bancorp Inc. raised $1.9 billion last month.

Kabat said at a conference May 12 that the company had ``taken steps'' to make loans to ``the right people,'' and that it might take time for the results to become apparent.

Capital Needs

``We haven't had the need, we don't foresee the need, to resort to any kind of significant common equity raise which we've seen a few in the industry need to do recently,'' Kabat said then.

Fifth Third is the last of Ohio's three largest banks to raise capital.

National City, the state's largest bank, raised $7 billion after its strategy of buying banks in Florida at the peak of the real estate boom backfired. Chief Executive Officer Peter Raskind said at a May 21 conference that the fresh capital was a ``real game-changer'' and said it would help the bank repair damage from its home equity, construction and subprime mortgage holdings.

KeyCorp said this month it was selling $1.65 billion in convertible and common stock after losing its own leasing tax case. The bank said it expected a second-quarter charge of $1.1 billion to $1.2 billion and increased its provision for loan losses that quarter by $600 million.

Ratings

Fitch Ratings downgraded Fifth Third one level, saying the action ``reflected deteriorating trends in asset quality, expectations for elevated levels of problem assets in the near term and a decline in profitability.'' Fitch said the new capital will provide a ``needed cushion'' for the lender.

Fifth Third said it would decide by June 30 whether to record a $250 million charge ``to address any downside risk related to the tax treatment of our leveraged leases,'' Fifth Third said in a filing.

The bank's offering convertible preferred shares at a yield of 8 percent to 8.5 percent, according to a person familiar with the sale. The offering is expected to take place as soon as this week, said the person, who declined to be identified because terms aren't set.

The perpetual securities will be rated Aa3, the fourth level of investment grade, by Moody's Investors Service and an equivalent AA- by Standard & Poor's.

Goldman Sachs is leading the banks arranging the stock offering, and will work with Credit Suisse Group AG and Merrill Lynch & Co.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: June 18, 2008 16:14 EDT