DBRS Comments on CIT Group Inc.’s 3Q13 Results, Issuer Rating at BB, Trend Positive

DBRS, Inc. (DBRS) has today commented on the 3Q13 financial results 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 $199.6 million compared to net income of $183.6 million in the prior quarter and a net loss of $299.2 million in 3Q12.

CIT’s financial results benefited from the absence of significant debt redemption charges which impacted the prior year results. Moreover, results reflect continued solid growth in commercial assets despite the tepid economic recovery, strong credit metrics and a well-managed balance sheet. Further, the results reflect the impact of CIT’s ongoing rationalization of its Vendor Finance business and the partial sale of the Dell Europe portfolio in the quarter, which impacted both revenues and operating expenses.

Despite asset sales as well as small and middle market companies remaining cautious during the quarter, CIT’s commercial financing and leasing assets grew 1% sequentially to $32.1 billion, representing the eighth consecutive quarter of sequential growth. Growth in commercial assets was primarily driven by the Corporate Finance segment. For the quarter, new funded volumes totaled $2.6 billion, a 19% improvement YoY. Factoring volumes, which tend to be seasonal, were $6.6 billion for the quarter compared to $6.4 billion a year ago. Within the Transportation segment, utilization rates in both the Commercial Air and Commercial Rail businesses remain strong.

Total net revenues were marginally higher sequentially at $462.3 million, but significantly improved from a deficit of $42.5 million a year ago. DBRS notes that 3Q12 net revenues were impacted by $454 million of charges related to the redemption of high cost debt. While earnings assets grew marginally, lower adjusted net finance margins (primarily due to the partial sale of the high-yielding Dell Europe portfolio) along with lower interest recoveries and a reduced benefit from suspended depreciation were among the key contributors to the 6% QoQ reduction in net finance revenue to $357.5 million. Adjusted net finance margin, which excludes debt redemption charges, and accelerated OID, was 4.22%; 40 bps lower QoQ, but 20 bps higher than in 3Q12 reflecting the progress made in expanding the deposit base as a proportion of overall funding and the repaying of high cost debt. 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 but was 3 bps lower QoQ at 1.04%. Overall, non-interest revenue expanded 32% sequentially to $104.8 million. The improvement was driven by a $21 million gain on the Dell Europe portfolio sale, a $13 million gain on a workout in commercial aerospace, a modest increase in factoring commissions and solid fees from Corporate Finance activities all of which more than offset the impairment on assets transferred to held for sale related to the Company’s international rationalization strategy.

Operating expenses totaled $232.2 million, including $3.2 million of restructuring costs. Excluding these costs, operating expenses were $229 million, a 4% increase QoQ. As a result, CIT’s operating expenses as a percentage of average earning assets were 2.74% in 3Q13 above the Company’s target of 2.00% to 2.50%. DBRS notes that the Company’s expectation is that operating expenses will be above the target range for the next couple of quarters as it exits certain subscale platforms internationally and incurs costs related to those exits.

Credit metrics remain strong and near cyclical lows. For 3Q13, NCOs were $27.1 million, or 0.59% of average commercial finance receivables compared to $18.0 million, or 0.44% a year ago. In the quarter, NCOs included approximately $5 million of Corporate Finance and $7 million of Vendor Finance charge-offs related to the transfer of loans to held-for-sale, while the prior quarter included approximately $20 million of similar charge-offs in the Corporate Finance segment. Non-accrual loans decreased 7% QoQ to $258.3 million, or 1.41% of commercial finance receivables. Provision for credit losses was $16.4 million in the quarter compared to $14.6 million in the prior quarter primarily related to loan growth. Allowance coverage remains sound at 1.94% of the commercial portfolio and 138% of non-accruals.

Funding and liquidity remain solid and well-managed. Deposits grew 6% on a sequential basis and in line with asset growth. At September 30, 2013, deposits totaled $11.8 billion constituting 35% of total funding. On a linked quarter basis, the weighted average coupon rate was stable at 3.09%, but 16 bps lower YoY reflecting the expanding presence of low-cost deposits in the funding mix. Liquidity, which is comprised of cash and short-term investment securities totaling $7.4 billion, as well as $1.9 billion of unused and committed capacity under the Company’s $2.0 billion revolving credit facility, is more than sufficient to meet the $2.8 billion of term debt maturities over the next two years.

With regards to regulatory capital, CIT’s preliminary Basel I Tier 1 ratio stood at 16.7% and Total Capital ratio was 17.4% both up 40 bps from the prior quarter. The solid quarterly earnings and a slight decline in risk-weighted assets more than offset $39 million in share repurchases. Further, CIT announced the reinstatement of a quarterly dividend on its common stock with an initial dividend of $0.10 a share to be paid in 4Q13. DBRS views the modest capital distribution, which is approximately 29% of 3Q13 net income, acceptable given the Company’s current regulatory capital levels, credit performance and organic capital generation ability.

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

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