DBRS Comments on CIT Group Inc.’s 1Q11 Earnings, Ratings Unchanged – Senior at B (high), Positive

DBRS Inc. (DBRS) has today commented that the ratings of CIT Group Inc. (CIT or the Company) including its Issuer Rating of B (high), remain unchanged following the Company’s 1Q11 financial results. The trend on all long-term ratings is Positive.

DBRS views CIT’s results as demonstrating the Company’s continued progress in achieving its strategic objectives. The results show advancement towards rebuilding the franchise, restoring profitability, and reducing balance sheet risk, while expanding the role of CIT Bank. For the quarter, CIT reported net income, on a GAAP basis, of $65.6 million compared to $74.8 million in the prior quarter and $145 million in the comparable period a year ago. Removing the impact of Fresh Start Accounting (FSA), in 1Q11, CIT reported its first pre-tax profit, (on an underlying basis), since emerging from reorganization. On an underlying basis, CIT generated a pre-tax profit of $17 million, a significant improvement from a $215.7 million pre-tax loss in the prior quarter and $294.1 million pre-tax loss in 1Q10. Underlying results were driven by a 24% increase in other income due to increased gains on asset sales and favorable net foreign exchange and derivative marks. While some of this improvement may be one-time in nature, underlying results benefited from lower credit costs and a 13% decline in operating expenses which are likely to be more sustainable. While DBRS views the underlying results positively, net interest revenue, excluding FSA, remains in a negative position, albeit reduced from the prior periods. Given CIT’s ongoing debt reduction efforts and the proactive steps it is taking to replace higher cost debt, DBRS expects that this positive trajectory will continue. Going forward, DBRS expects the underlying earnings profile will continue to improve, as the Company restores the strength of the franchise and generates new higher yielding business.

Importantly, the Cease and Desist Orders (C&D) on CIT Bank (the Bank) were recently removed by the FDIC and Utah Department of Financial Institutions. DBRS considers these actions as important steps in the Company’s strategy to expand the role of CIT Bank in funding a greater share of business through the Bank. To this end, during the quarter, CIT Bank’s committed loan volumes rose 15% from the prior quarter to $777 million, or 60% of U.S. lending volume was funded through the Bank. During 1Q11, CIT also transferred its small business lending platform into the Bank, which will further advance the transition to a more “bank centric” funding model.

Company-wide funded volumes, while down slightly from the prior quarter, were up 47% year-on-year to $1.3 billion, driven by solid growth in Corporate Finance and Transportation Finance. Importantly, with portfolio principal pay-downs totaling $1.5 billion in 1Q11, the gap between new funded origination volumes and portfolio run-off is narrowing. DBRS sees the positive trajectory in new business volumes as demonstrating CIT’s progress in its plans to restore the franchise and customer confidence in the Company.

Credit performance of the loan book is trending positively. On a pre-FSA basis, gross charge-offs declined 31% on a linked quarter basis to $210.3 million, or 3.27% of average finance receivables. Charge-offs declined due to improving credit trends and the impact on the prior quarter of a refinement to delinquency-based charge-off practices. Non-accrual loans, excluding FSA accounting, decreased 19% to $1.6 billion, primarily reflecting asset sales in the Corporate Finance loan book. Moreover, for the third consecutive quarter, the pace of new inflows into non-accrual status decreased, suggesting continued improvement in asset quality in the near term. The aforementioned resulted in a 32% (quarter-on-quarter) decline in provisions for loan losses to $123.4 million. Given the challenging environment for small and middle market businesses, which are CIT’s core clientele, DBRS views the positive credit trends as illustrating the Company’s sound underwriting and servicing abilities, as well as the continued progress in removing risk from the balance sheet. Nevertheless, DBRS remains cautious given the uncertain economic recovery.

CIT continues to make progress in strengthening its funding profile. During the quarter, CIT returned to the corporate debt markets for the first time since 2007, completing a $2.0 billion issuance of lower cost debt. During 1Q11, CIT redeemed $1.75 billion of high-cost debt and has announced that it will redeem an additional $2.5 billion of high-cost Series A Notes during 2Q11. Liquidity remains solid with total cash and investment securities of $12.1 billion, or 24% of total assets. Risk weighted assets declined 4% in the quarter reflecting ongoing optimization of the loan portfolio. As a result, capital ratios substantially exceed regulatory minimums with a preliminary Tier 1 capital ratio of 20.1% and a total capital ratio of 21.0% at March 31, 2011.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States. Other methodologies applied include the DBRS Rating Methodology for Leveraged Finance. Both of which can be found on our website under Methodologies.

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Roger Lister
Initial Rating Date: 17 May 2010
Most Recent Rating Update: 23 March 2011