This is quite impressive but it doesn't work for some scenarios. e.g. this one :

insert into t1

select 'AAA22222222222222BB5BB 33CCCCCCCCC342234234'

EDIT: I meant it for Chris response:

SELECT

t.name, x.New_Name

FROM #t1 t

CROSS APPLY (

SELECT New_Name =

(SELECT Newletter + ''

FROM (

SELECT n, Newletter = CASE WHEN d.grouper IS NOT NULL

AND COUNT(*) OVER (PARTITION BY d.grouper) > 5 THEN 'x' ELSE letter END

FROM (

SELECT n, letter,

grouper = ROW_NUMBER() OVER(PARTITION BY t.name ORDER BY ISNUMERIC(letter), n) - N

FROM (SELECT TOP(LEN(t.name)) n = ROW_NUMBER() OVER(ORDER BY (SELECT NULL))

FROM sys.columns a, sys.columns b) tally

CROSS APPLY (SELECT letter = SUBSTRING(t.name,n,1)) l

) d

) stri

ORDER BY n

FOR XML PATH('') , TYPE).value('.', 'varchar(max)')

) x

ORDER BY t.name