DBRS: CIT’s Ratings Unaffected by Q4 2008 Loss – Senior at A (low), Negative Trend

DBRS has today commented that the ratings of CIT Group Inc. (CIT or the Company), including its Issuer and Long-Term Debt rating of A (low), are unaffected by the fourth-quarter loss. The trend on the Company’s Issuer and Long-Term Debt remains Negative and the trend on its Commercial Paper R-2 (high) rating remains Stable.

This comment follows CIT’s earnings release, which indicated a loss from continuing operations of $139.4 million for the fourth quarter of 2008. CIT’s quarterly loss was driven by weakening asset quality, which resulted in higher provisioning expense, writeoffs related to the European Vendor Finance operations, continued pressure on interest margins, and by the costs associated with becoming a bank holding company. Continued deterioration in the global economic environment during the fourth quarter led CIT to increase reserves for credit losses by approximately $240 million, $222 million of which was related to its core commercial business segments. The reserve build significantly increases the reserves as a percentage of commercial segment finance receivables to 2.11% from 1.52% at September 30, 2008.

Earnings were further pressured by the compression in interest margins resulting from higher funding and liquidity costs as well as the carry cost of the higher level of cash. Net finance revenue as a percentage of average earning assets declined to 1.38% at December 31, 2008, from 2.20% in Q3 2008. Offsetting these pressures on earnings was a pre-tax gain of $216 million, primarily related to the early extinguishment of certain debt and lower operating expenses. While DBRS considers the sizable quarterly loss as tolerable, given the current recessionary environment and the transformation of CIT to a bank holding company, DBRS notes that the loss brings the total loss for CIT in 2008 to a noteworthy $2.9 billion. DBRS views CIT’s ability to return to a level of profitability as a chief challenge for the Company, especially as the headwinds caused by the deteriorating economic environment increase. The current ratings have little tolerance for ongoing losses. As such, rating stability is predicated on the Company’s ability to illustrate that its franchise remains intact and its earnings generation ability in the core businesses, especially its Corporate Finance segment, remain solid. DBRS notes that CIT’s Transportation, Trade and Vender Finance segments continue to record quarterly underlying profits.

CIT’s asset quality metrics weakened, as the economic environment deteriorated rapidly during the quarter. Net charge-offs as a percentage of average finance receivables increased significantly to 1.42% in the commercial business segments, up from 0.95% for the third quarter of 2008. This increase, as well as the increase in non-performing assets, is largely attributable to the increase in losses in the Corporate Finance segment. Given the continuing deterioration in the global economy, DBRS anticipates the Company’s asset quality measures will weaken further in 2009, adding pressure to earnings in the near term. Although DBRS has factored in a level deterioration of asset quality metrics, continued increasing credit costs could pressure ratings, especially should the increased levels of provisions reduce the Company’s ability to protect its franchise.

On a positive note, DBRS views CIT’s capital position as solid, with a total tangible capital-to-managed assets ratio of 14.3% at December 31, 2008, up from 9.2% at September 30, 2008. During the fourth quarter of 2008, CIT took various actions to enhance its capital position, including selling $2.33 billion of perpetual preferred stock and related warrants to the U.S. Treasury as a participant in the federal government’s Capital Purchase Program.

CIT has made notable progress in addressing its liquidity position and transforming and reducing the balance sheet. Nonetheless, funding and liquidity risk remain elevated and a primary focus of DBRS. Funding requirements are estimated at $12 billion for 2009, including $2.1 billion of bank lines due in April 2009. The Company indicated it expects to meet those needs without accessing the unsecured debt markets. Furthermore, CIT has applied for the Temporary Liquidity Guarantee Program (TLGP) of the Federal Deposit Insurance Corporation (FDIC). Upon acceptance into the program, CIT estimates that it would have capacity to issue approximately $10 billion of FDIC-guaranteed debt. DBRS would positively view acceptance into this program.

The Negative trend on the long-term debt reflects DBRS’s view that CIT faces sizable near-term challenges, which include certain earnings pressure from elevated funding costs, higher credit costs and liquidity pressures stemming from the disrupted capital markets. The Negative trend reflects our view that ratings will be pressured by continued deterioration in credit performance, thereby CIT’s ability to limit credit costs in this negative cycle is paramount to ratings stability. DBRS recognizes that CIT has taken monumental actions, including the conversion to a bank holding company and the acceptance of Troubled Assets Relief Program (TARP) capital to stabilize its capital position and made progress in stabilizing its liquidity; however, maintaining and ultimately improving the liquidity profile is also crucial to rating stability. The ratings may also be pressured by further encumbering of the balance sheet. Finally, DBRS remains concerned that the reduced level of profitability due to pressured margins, reduced loan volume and increasing credit costs may weaken CIT’s ability to protect its strong franchise, which underpins the rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our website under Methodologies.

This is Corporate (Financial Institutions) rating.