DBRS Comments on CIT Group Inc.’s 2Q13 Results, Issuer Rating at BB, Trend Positive

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $183.6 million compared to net income of $162.6 million in the prior quarter and a net loss of $72.9 million in 2Q12.

CIT’s financial results benefited from the absence of significant debt redemption charges which impacted the prior year’s results. Further, results reflect solid growth in commercial assets despite the slow economic environment, favorable credit performance and a balance sheet that continues to be well-managed. DBRS notes that revenue growth was accompanied by lower operating costs resulting in positive operating leverage.

In the quarter, commercial financing and leasing assets grew 1% sequentially to $31.7 billion. Growth in commercial assets was witnessed across all segments, with the exception of Trade Finance, reflecting $2.9 billion of new funded volumes, a 48% increase on a linked quarter basis, somewhat offset by normal portfolio run-off, higher prepayments and asset sales. Within Trade Finance, factoring volumes, which tend to be seasonal, were $6.0 billion for the quarter compared to $6.1 billion a year ago. Meanwhile, utilization rates remain strong in both the Commercial Air and Commercial Rail businesses.

Total net revenues were 6% higher QoQ at $460.6 million and nearly twice that generated a year ago. DBRS notes that 2Q12 net revenues were impacted by $264.9 million of charges related to the redemption of high cost debt. Growth in commercial earning assets and solid margins underpinned the 4% QoQ expansion in net finance revenue to $381.3 million. Adjusted margins were stable on a sequential basis, but improved YoY reflecting the Company’s continued success in increasing the proportion of funding from lower-cost deposits combined with generating attractive yielding assets. For 2Q13, the adjusted net finance margin, which excludes debt redemption charges, and accelerated OID, was 4.62% 2 basis points (bps) lower QoQ, but 21 bps higher than a year ago. Core non-spread revenue, which includes factoring commissions, fee income and gains on sale of leasing equipment, as a percentage of average earning assets improved 19 bps QoQ to 1.07%. Overall, non-interest revenue expanded 13% sequentially to $79.3 million. The improvement was driven by gains on equipment sales primarily related to the sale of commercial aircraft and a modest increase in fee revenue partially offset by losses related to the sales of certain international platforms largely reflecting foreign currency translation.

CIT continues to make progress on its cost reduction initiatives. Operating expenses totaled $230 million, including $10 million of restructuring costs. Excluding these costs, operating expenses were $220 million, a 4% reduction QoQ. As a result, CIT’s operating expenses as a percentage of average earning assets were 2.73% in 2Q13, 12 bps lower than in the prior quarter and continuing to migrate towards the Company’s target of 2.25% to 2.50%. 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.

Credit performance was stable at cyclical lows; however, asset quality metrics were impacted by the Company’s actions taken to rationalize subscale portfolios and the corresponding transfer of the portfolios to held-for-sale. For 2Q13, NCOs were $29.1 million, or 0.63% of average commercial finance receivables compared to $9.5 million, or 0.22%. During the period, approximately $20 million of charge-offs related to the transfer of loans to held-for-sale in the Corporate Finance segment impacted performance. Excluding these loans, NCOs were broadly stable across the commercial segments. Non-accrual loans were lower across all commercial segments with the exception of Vendor Finance. Indeed, non-accrual loans decreased 5% QoQ to $278.5 million, or 1.53% of commercial finance receivables. Provision for credit losses was $14.6 million in the quarter compared to $19.5 million in the prior quarter primarily related to loan growth. Allowance coverage remains solid at 2.02% of the commercial portfolio and 132% of non-accruals.

CIT’s balance sheet strength remains solid. At June 30, 2013, deposits totaled $11.1 billion and constituted nearly 35% of total funding. The expanding presence of low cost deposits in the funding mix resulted in the Company’s average cost of funds declining by 4 bps QoQ to 3.09% and 72 bps lower YoY. Further, the Company renewed two Vendor Finance conduit facilities at more attractive terms and redeemed the remaining $20 million of the high-cost InterNotes. Liquidity continues to be well-managed with total cash and short-term investment securities of $6.9 billion, 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 Basel I Tier 1 ratio of 16.3% and a Total Capital ratio of 17.0% at June 30, 2013. Positively, during the quarter, the Federal Reserve Bank of New York (FRBNY) terminated the Written Agreement, dated August 12, 2009, between CIT and the FRBNY. Following the lifting of the Written Agreement, CIT announced a share repurchase plan of up to $200 million of common stock through the remainder of 2013. DBRS views the modest capital distribution as acceptable given the Company’s current regulatory capital levels and ability to generate organic capital.

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

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