DBRS Comments on CIT Group Inc.’s 1Q12 Results, Ratings Unaffected at BB (low), Trend Positive

DBRS, Inc. (DBRS) has today commented that the ratings of CIT Group Inc. (CIT or the Company), including its Issuer Rating of BB (low), remain unchanged following the Company’s 1Q12 financial results. The trend on all long-term ratings is Positive.

CIT’s results show the benefits of management’s efforts to reduce funding costs, lower credit costs, increase underlying profitability, grow commercial assets, advance debt restructuring, while expanding the role of CIT Bank. For the quarter, CIT reported a net loss, on a GAAP basis, of $446.5 million compared to net income of $43.6 million in the prior quarter and $65.6 million in the comparable period a year ago. Excluding the impact of Fresh Start Accounting (FSA) and debt refinancing charges, CIT reported underlying pre-tax income of $154.5 million, a 10% improvement on a linked quarter basis and a more impressive 187% higher than the comparable period a year ago. The solid underlying results were driven by lower funding costs, higher gains on asset sales and the increase in commercial asset originations at attractive pricing. Margins continue to benefit from the Company’s success in reducing funding costs. Indeed, net financing margin, excluding FSA and pre-payment penalties, was 1.97%, a 56 basis point (bps) increase year-on-year. On a sequential basis, net finance margin was 10 bps lower reflecting a 20 bps decline in pre-FSA asset yields, largely driven by an adjustment to interest revenue in the Vendor Finance business and lower interest recoveries during the quarter. Given the one-time nature of the aforementioned adjustment to interest revenue, DBRS views the decline in margin as temporary and expects margins to revert to their expansionary path in 2Q12 reflecting CIT’s progress in lowering funding costs. As such, DBRS expects that the underlying earnings profile will continue to improve, as the Company continues to build up the strength of the franchise, generates new higher yielding business and takes additional proactive steps to lower the cost of funding.

From DBRS’s perspective, CIT’s results illustrate the ongoing restoration of the franchise evidenced by solid loan growth and higher business volumes despite the unsettled operating environment. To this end, commercial assets grew for the second consecutive quarter while pricing remained favorable. Funded new business volume totaled $2.0 billion, a 51% increase year-on-year, while committed new business volume of $2.5 billion, represent a 46% increase y-o-y. New business volumes were driven by Corporate Finance and Vendor Finance which experienced double digit growth in both funded and committed volumes y-o-y. Moreover, CIT continues to advance its transformation to a more bank-centric model. During the quarter, CIT Bank’s committed loan volumes rose 18% from the prior quarter and more than doubled from the year-ago period to $1.6 billion, or 80% of U.S. lending volume was funded through the Bank.

The steady improvement in credit performance continued in 1Q12 as net charge-offs, non-accrual balances and new flows to non-accrual status declined sequentially and year-on-year. Net charge-offs declined 9.5% on a linked quarter basis to $22.0 million, or 0.42% of average finance receivables. Non-accrual loans decreased 31% quarter-on-quarter to $481.9 million, or 2.35% of finance receivables. The notable reduction primarily reflects the completion of a multi-phased Corporate Finance loan portfolio sale. Moreover, for the seventh consecutive quarter, the pace of new inflows into non-accrual status decreased, suggesting continued improvement in asset quality in the near term. Notwithstanding the aforementioned positive trends, provision for loan losses increased quarter-on-quarter to $42.6 million compared to $15.8 million in 4Q11, but remain well-below the $122.4 million amount in 1Q11. The increase reflects the growth in commercial assets during the quarter was lending related, where the last quarter’s growth was primarily in leased equipment. DBRS considers the positive credit trends as demonstrating the Company’s sound underwriting and servicing capabilities, as well as the continued progress in removing risk from the balance sheet. Nevertheless, DBRS remains cautious given the uneven economic recovery.

CIT continues to make appreciable progress in advancing the transformation of the funding profile. During the quarter, the Company redeemed the remaining $6.5 billion of Series A Notes, which resulted in the majority of the Company’s debt to become unsecured. Moreover, in the current quarter, CIT has redeemed or announced its intention to redeem approximately $2.1 billion of high-cost Series C notes, which will bring the total amount of high cost debt either repaid or refinanced since the start of 2010 to $24 billion. Moreover, CIT’s funding rates, taking into account the April and May 2012 redemptions, have been lowered to 4.05% from 4.71% at December 31, 2011. Importantly, during the quarter, CIT issued $1.5 billion of senior unsecured notes, the Company’s first issuance of unsecured debt since 2007. CIT continues to expand its online deposit offerings and internet deposits now exceed $1.1 billion. Total deposits now comprise 21% of overall funding, double from 1Q11. Liquidity remains solid with total cash and investment securities of $7.3 billion, or 17% of total assets. With regards to capital, CIT’s capital ratios substantially exceed regulatory minimums with a preliminary Tier 1 capital ratio of 17.6% and a total capital ratio of 18.5% at March 31, 2012.

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

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

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Approver: William Schwartz
Initial Rating Date: May 17, 2010
Most Recent Rating Update: February 13, 2012

For additional information on this rating, please refer to the linking document under Related Research.