DBRS Comments on CIT Group Inc.’s 4Q12 Results, Issuer Rating at BB, Trend Positive

DBRS, Inc. (DBRS) has today commented on the 4Q12 earnings of CIT Group Inc. (CIT or the Company), DBRS rates CIT’s Issuer and Senior Unsecured Debt at BB with a Positive trend. For the quarter, the Company reported net income of $206.8 million compared to net income of $36.3 million in the comparable period a year ago and a net loss of $299.2 million in the prior quarter. DBRS notes that 4Q12 results were impacted by $82.6 million of charges primarily related to the sale and restructuring of student loan asset-backed securities, while the year ago period was impacted by debt redemption charges of $149.7 million and the prior quarter’s loss was driven by charges related to the redemption of high cost debt. Excluding these charges, CIT reported pre-tax income of $334.4 million, up from $221.0 million a year ago and $176 million sequentially.

In an uneven macroeconomic environment, CIT’s results were underpinned by expanding margins, solid growth in new business volumes and credit performance that remains at cyclical lows. Funded volumes were higher both sequentially and year-on-year (YoY) with commercial real estate (CRE) and equipment finance particularly strong. As a result, commercial earning assets grew for the fifth consecutive quarter. Margins improved reflecting the benefit of the debt redemption actions taken earlier in 2012, while asset yields were broadly stable. DBRS views favorably the Company’s ability to grow the core commercial businesses profitably, while maintaining credit discipline and lowering the funding costs through liability management actions.

Results were driven by a significant increase in total net revenues both on a sequential and YoY basis. For the quarter, CIT generated $483.8 million of total net revenues compared to $297.8 million a year ago and a deficit of $42.5 million in 3Q12. DBRS notes that the prior quarter was impacted by $471 million of charges related to the redemption of high cost debt. Net finance revenue totaled $312.1 million on solid growth in commercial earning assets and improved margins. Excluding net FSA accretion, debt redemption charges, and accelerated OID, the net financing margin was 3.63%, a substantial 161 basis point (bps) increase YoY. On a sequential basis, the net finance margin was 68 bps higher, reflecting improved funding costs and a reduction of low yielding student loan assets. Meanwhile, non-interest revenue nearly doubled QoQ to $171.7 million reflecting increased activity in the Company’s core businesses and certain event driven items. Core non-interest revenue (factoring commissions, fee revenue and gains on equipment sales) was up 10% QoQ primarily driven by higher gain on sale of leasing equipment.

Excluding restructuring charges, operating expenses were approximately $220.0 million, lower QoQ by $10 million owed to a recovery of legal fees. Excluding this item, operating expenses were largely flat. CIT has set a plan to improve operating efficiency in 2013, while maintaining investments to build the bank franchise and sustain growth in the core businesses. DBRS sees executing on this initiative as an important step towards achieving and strengthening sustainable earnings generation. Overall, DBRS expects CIT’s earnings profile to continue to improve as 2013 progresses reflecting further evolution in the funding mix towards deposit funding and solid new business activity across all business lines.

Positively, all four commercial business segments were solidly profitable in 4Q12 with all segments reporting volume growth sequentially and sound credit metrics. Funded new business volume totaled $3.1 billion, a 41% increase sequentially and 6% higher YoY. Corporate Finance reported its seventh consecutive quarter with over $1.0 billion of new commitments. Also, during 4Q12, CIT announced a portfolio purchase with $1.3 billion of commitments and nearly $800 million of funded volume in a combination of CRE, equipment financing and asset-based lending. DBRS notes the acquisition will close in 1Q13. Utilization rates remain strong in both the Commercial Air and Commercial Rail businesses. Further, CIT announced that it was re-launching the CIT Maritime Business, which DBRS sees as a complementary fit to the existing Transportation Finance businesses. Within Trade Finance, factoring volumes were up 8% QoQ reflecting seasonality, but were flat YoY. In the Vendor business, volumes were 23% higher QoQ driven by solid growth in its international markets. CIT continues to advance its transformation to a more bank-centric model with over 95% of U.S. lending and leasing volume funded through the Bank.

Credit metrics continue to be at cyclical lows. Within the Company’s core commercial segments, net charge-offs (NCOs) and non-accrual balances were lower sequentially and YoY. For the quarter, NCOs declined 3 bps, on a linked quarter basis, to 0.41% of average finance receivables, or $17.4 million. Non-accrual loans decreased 20% QoQ to $330.2 million, or 1.93% of commercial finance receivables. Lower levels of non-accruals in the Corporate Finance and Trade Finance segments reflecting repayments and a return of loans to accrual status were the primary drivers of the decline in overall non-accrual balances. The favorable trends in credit performance resulted in allowance for loan losses to decline 5% QoQ to $379.3 million. Nonetheless, reserve coverage remained solid at 2.21% of the commercial portfolio.

DBRS notes that CIT’s evolving funding profile and sound capital levels underpin the Company’s strengthening financial risk profile. CIT generated solid deposit growth, while maintaining pricing discipline demonstrating the Company’s prudent management of funding and liquidity. Deposits at CIT Bank expanded by $1.5 billion, or 12% QoQ, to $9.6 billion with 75% of the growth sourced through online channels. At December 31, 2012, CIT’s online retail deposits stood at $4.5 billion. As a result, deposits comprised 31% of funding, with secured and unsecured funding comprising 32% and 37%, respectively at quarter-end. The increased presence of low cost deposits in the funding stack has enabled CIT to lower its average cost of funds to 3.18% in 4Q12, a 7 bps improvement from 3Q12, and 151 bps lower YoY. Liquidity continues to be well-managed with total cash and investment securities of $7.6 billion, or 17% of total assets, as well as $1.9 billion of unused and committed capacity under the Company’s $2.0 billion revolving credit facility.

Capital levels declined modestly QoQ on higher risk-weighted assets driven by commercial asset growth, as well as the announced order for ten new aircraft and the commitment to purchase a commercial loan portfolio. Nevertheless, capital ratios remain well in excess of regulatory minimums with a preliminary Tier 1 ratio of 16.2% and a Total Capital ratio of 17.0% at December 31, 2012.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]