DBRS Comments on CIT Group Inc.’s 2Q Results; Unchanged at B (high), Trend Positive

DBRS has today commented that the ratings of CIT Group, Inc. (CIT or the Company), including its Issuer Rating of B (high), are unaffected by the Company’s announcement of 2Q10 earnings results indicating net income of $142 million up from $97.3 million in the prior quarter. The trend on all long-term ratings is Positive.

CIT’s 2Q results evidence the Company’s continued progress in repaying higher cost secured debt, optimizing the portfolio and defending the core franchise. Importantly, CIT’s core commercial franchise remains solid illustrated by the 14% increase in new business volume to over $1.0 billion during the quarter. DBRS sees this as further confirmation that the reorganization process in the fall of 2009 had minimal impact on the core business of the Company. Additionally, during the quarter, CIT nearly completed the build out and enhancement of its senior management team.

Earnings improved quarter-on-quarter driven by an increase in non-interest income attributable to gains on sales of assets as the Company continues to streamline its portfolio. Also, earnings benefited from improved recoveries of pre-fresh start accounting (FSA) charged-off receivables; however, this improvement was offset by higher provisioning for credit losses. Furthermore, CIT’s 2Q earnings were supported by $406 million of pre-tax FSA accretion income. While business fundamentals improved, the prominence of high cost debt in the capital structure continues to be a substantial headwind limiting underlying earnings ability. Excluding FSA accretion income, CIT’s pre-tax loss totaled $193.5 million; however, the loss narrowed from $281.1 million in the prior quarter.

CIT’s liquidity profile continues to improve. During the quarter, CIT repaid an additional $2.3 billion of the high-cost first lien debt and an additional $450 million subsequent to quarter-end. As such, the Company has $4.0 billion of first lien debt outstanding, down significantly from $7.5 billion at the start of 2010. DBRS sees CIT’s continued progress in repaying and refinancing the high cost debt as key to restoring the Company’s ability to generate a sufficient level of underlying profitability. Further, CIT continues to demonstrate good access to more cost-efficient funding sources completing, to date, $2.5 billion in secured financing, improving funding flexibility. In 2Q10, the Company closed a new $650 million committed conduit facility for Trade Finance and a GBP 100 million committed U.K. Vendor Finance conduit facility. Nonetheless, CIT continues to focus on shifting its funding model to a more “bank-centric” model and reduce reliance on wholesale funding sources, which DBRS views as a long-term challenge. That said, DBRS expects continued progress on executing additional liquidity enhancing projects in the upcoming quarters.

Asset quality remains acceptable. On a pre-FSA basis, gross charge-offs increased $16 million from the prior quarter to $252 million, or 2.89% of average finance receivables. The increase was primarily driven by an increase in charge-offs within Corporate Finance, resulting from weakness in real estate and energy loans. Provisions for loan loss increased 40% quarter-on-quarter to $261 million due to the increased new origination volume, additional reserves for a liquidating consumer portfolio and higher post-FSA charge-offs. However, these provisions do not reflect the benefit $97 million of recoveries realized by CIT during the quarter on pre-emergence loans. Moreover, the remaining $1.2 billion of non-accretable discount (marks) on the balance sheet at the end of 2Q10 limits potential exposure to losses on the pre-emergence loan portfolio. CIT’s coverage ratio, including the FSA accretable discount, remains solid at 5.0% of pre-FSA loans. Given the still challenging environment for small and middle market businesses, which are CIT’s core clientele, DBRS views the credit performance of the loan portfolio as illustrating the Company’s sound underwriting and servicing abilities as well as the continued progress in removing risk from the balance sheet.

Capital remains solid. An increase in common equity and further reductions in risk-weighted assets, owed to ongoing removal of non-core assets, resulted in improving capital ratios. CIT reported a Tier 1 capital ratio of 17.2% and a total capital ratio of 17.9% at the end of 2Q10. Moreover, leverage continues to decline with debt-to-equity of 4.4x at June 30, 2010.

The Positive trend reflects DBRS’s expectations that the Company should continue to make progress in improving and diversifying its funding profile, while restoring underlying profitability.

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.