DBRS Comments on CIT Group Inc.’s 1Q13 Results, Issuer Rating at BB, Trend Positive
Non-Bank Financial InstitutionsDBRS, Inc. (DBRS) has today commented on the 1Q13 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 $162.6 million compared to net income of $206.8 million in the prior quarter and a net loss of $427.0 million in 1Q12.
DBRS views CIT’s results as acceptable given the slow growth economic environment, which continues to dampen corporate investment and spending. Revenue generation softened on a linked quarter basis owed to lower customer activity and the absence of certain items which positively impacted the prior quarter, but were up substantially YoY. From DBRS’s perspective, CIT’s results evidence continued progress in strengthening the franchise and further advancement towards generating sustainable earnings consistent with that level of franchise strength. Further, the results reflect the improving funding mix at lower cost, as well as credit performance that continues to be at cyclical lows.
Uncertainty in the U.S. economy, partly stemming from budget discussions in Washington, resulted in funded new business volumes that declined 37% QoQ to $1.9 billion, but were only slightly lower YoY. Total loans grew 6% during the quarter to $22.1 billion partially due to the previously announced purchase of approximately $700 million of loans in Corporate Finance and the purchase of approximately $150 million of Vendor Finance receivables.
Total net revenues were 10% lower QoQ at $435.6 million, but markedly improved from a deficit of $96.0 million a year ago. DBRS notes that 1Q12 revenues were impacted by approximately $600 million of charges related to the redemption of high cost debt. Growth in commercial earning assets and solid margins underpinned the 17% QoQ growth in net finance revenue to $365.5 million. Margins softened on a sequential basis, but remain above year ago levels reflecting the Company’s success in lowering funding costs by improving the funding mix and generating higher yielding assets. Adjusted net finance margin, which excludes debt redemption charges, and accelerated OID, was 4.64%, 24 basis points lower from the prior quarter, but 167 bps higher than 1Q12. Core non-spread revenue, which includes factoring commissions, fee income and gains on sale of leasing equipment, as a percentage of average earning assets was stable YoY at 0.88%. Overall, non-interest revenue declined to $70.1 million, 59% lower sequentially. The absence of some event driven items in the prior quarter along with lower gains on sale of leasing equipment and reduced fee revenue on lower lending activity were the primary contributors to the reduction in non-spread revenue. Indeed, in 4Q12 non-interest income benefited from higher recoveries on pre-emergence loans, elevated counterparty receivable accretion and gains on loan sales.
Excluding restructuring charges and adjusting for a $10 million recovery of legal fees in the prior quarter, operating expenses were $229 million, broadly unchanged from the prior quarter. CIT’s focus remains on improving operating efficiency in 2013, while maintaining investments to build the bank franchise and sustain growth in the core businesses. To this end, CIT has reduced headcount and the use of third party service providers and exited seven small platforms in Latin America and Asia. DBRS sees CIT’s ability to successfully execute its plans to reduce the cost base while driving solid growth in the commercial asset book as an important element towards strengthening sustainable earnings generation.
For the second consecutive quarter, all four commercial business segments were profitable supported by growth in interest income and sound asset quality. Utilization rates remain strong in both the Commercial Air and Commercial Rail businesses. Within Trade Finance, factoring volumes were up 6% YoY reflecting progress in recapturing clients lost during the reorganization and improved penetration in non-apparel related industries. In the Vendor business, volumes contracted 25% QoQ reflecting seasonality and lower sales in the technology sector.
Asset quality was stable at cyclical lows. Net charge-offs and non-accrual balances within the Company’s core commercial segments were lower sequentially and YoY. For 1Q13, NCOs declined 19 bps, on a linked quarter basis, to 0.22% of average commercial finance receivables, or $9.5 million. Non-accrual loans decreased 11% QoQ to $294.1 million, or 1.59% of commercial finance receivables. Non-accrual loan balances were lower across all segments, with the exception of Vendor Finance, which experienced a modest increase. Despite the continued favorable credit performance, provision for credit losses were $20 million in the quarter compared to nil in the prior quarter primarily related to loan growth. Allowance coverage remains solid at 2.08% of the commercial portfolio and 131% of non-accruals.
During the quarter CIT grew deposits by $1.0 billion to $10.6 billion, with over half of all deposits sourced through online channels. CIT continues to improve its funding mix with deposits now accounting for 33% of total funding. The growing presence of low cost deposits in the funding profile enabled CIT to lower its average cost of funds by 5 bps QoQ to 3.13% and 108 bps lower YoY. Liquidity continues to be well-managed with total cash and short-term investment securities of $6.9 billion, or 15.5% of total assets, as well as $1.9 billion of unused and committed capacity under the Company’s $2.0 billion revolving credit facility. Regarding capital, CIT’s capital levels were stable QoQ, with a preliminary Tier 1 ratio of 16.3% and a Total Capital ratio of 17.1% at March 31, 2013.
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All figures are in U.S. dollars unless otherwise noted.
[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]