DBRS Comments on CIT Group Inc.’s 3Q10 Results; Unchanged at B (high), Trend Positive
Non-Bank Financial InstitutionsDBRS 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 3Q10 earnings results. The trend on all long-term ratings is Positive.
For 3Q10, CIT reported net income of $131.5 billion, on a GAAP basis, the third consecutive quarter of profitability. Earnings continue to benefit from pre-tax fresh start accounting (FSA)-related items, which totaled $266 million in the quarter. On an underlying basis, excluding FSA accretion income, CIT’s pre-tax loss totaled $70.3 million; however, the loss narrowed from $166 million in the prior quarter. DBRS views the smaller underlying loss as demonstrating the Company’s continuing progress towards restoring underlying profitability. Management’s continued focus on removing excess operating costs and reducing high-cost debt is having a positive impact on profitability. Indeed, operating expenses were lower than 2Q10 and interest expense declined 10% as a direct result of these actions. Moreover, underlying earnings benefited from the favorable movement in credit trends resulting in a 32% reduction in provisioning for credit losses compared to the prior quarter. While business fundamentals improved, high funding costs continue to compress margins providing a noteworthy headwind limiting underlying earnings ability.
Importantly, the results evidence good momentum in CIT’s core businesses, with funded volumes in excess of $1.0 billion and volumes increasing in three of the Company’s four commercial businesses. DBRS sees this as further confirmation that the Company continues to advance its plans designed to restore the franchise and customer confidence in the Company post-reorganization.
Credit performance continues to show signs of stabilization. On a pre-FSA basis, gross charge-offs declined $19 million from the prior quarter to $233 million, or 2.97% of average finance receivables. Non-accrual loans, excluding FSA accounting, decreased 14.8% to $2.6 billion. Importantly, the pace of new inflows into non-accrual status decreased substantially, suggesting longer-term improvement in asset quality. As a result of the improving loan performance, provisions for loan losses decreased 32% quarter-on-quarter to $165.2 million. Coverage ratios, including the FSA accretable discount, remain solid at 115% of non-accrual loans at September 30, 2010, despite the decline in provisioning. Moreover, the remaining $583.3 million of non-accretable discount (marks) on the balance sheet at the end of 3Q10 provides additional cushion from potential losses on the pre-emergence loan portfolio. Given the uneven recovery, which continues to pressure small and middle market businesses, which are CIT’s core clientele, DBRS views the trends in the 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.
CIT’s funding profile continues to improve. Year-to-date, CIT has repaid $4.5 billion of high cost first lien debt and refinanced the remaining $3.0 billion at more favorable terms. In addition, in September and early October, CIT announced the redemption of $1.4 billion of the 10.25% second lien Series B Notes, which will be completed in 4Q10. Liquidity remains solid with total cash increasing to $11.5 billion, or 21.7% of total assets. Capital ratios substantially exceed regulatory minimums and have benefited from organic capital generation and further reductions in risk-weighted assets, owed to ongoing removal of non-core assets. CIT reported a Tier 1 capital ratio of 18.7% and a total capital ratio of 19.6% at the end of 3Q10. Moreover, leverage continues to improve with debt-to-equity of 4.1 times at September 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.