DBRS: CIT’s 4Q13 One-offs Mask Solid Underlying Performance; Good Growth in Funded Volumes

Summary:

• CIT’s funded volumes totaled $3.1 billion; highest level post-reorganization
• One-time items masked solid underlying performance with adjusted revenues stable and underlying operating expense substantially unchanged QoQ
• DBRS rates CIT Group Inc. Issuer Rating at BB with a Positive trend.

DBRS, Inc. (DBRS) considers CIT Group Inc.’s (CIT or the Company) 4Q13 results as evidencing the strength of the Company’s commercial lending franchise with solid expansion in funded volumes in a highly competitive market. Moreover, despite a number of one-time items that resulted in lower YoY results, DBRS sees the Company’s underlying results as sound despite the expected compression in adjusted finance margins and operating expenses that remain above Company targets.

Positively, CIT reported new funded volumes of $3.1 billion in the quarter, the highest level post-reorganization. Corporate finance volumes were higher and with the mix balanced between asset-secured and cash flow loans. The delivery of 11 new aircraft and approximately 1,800 railcars as well as over $0.4 billion of lending drove the growth in Transportation Finance volumes. However, Vendor Finance volumes were lower reflecting the exit from certain subscale international platforms. As a result of the expansion in overall volumes, total commercial earning assets were 8% higher YoY and 2% higher QoQ at $32.7 billion.

DBRS- calculated adjusted revenues were stable QoQ at $474 million as adjusted net finance revenue was lower reflecting the sale of the higher yielding Dell European Vendor Finance portfolio and some lease rate compression on aircraft lease renewals. Higher fee revenue including an increase in capital market fees in Corporate Finance were the primary driver of the improvement in adjusted non-interest income. From DBRS’s perspective, the improved full year revenue generation, (DBRS-calculated adjusted revenues for 2013 were $1.9 billion, 31% higher YoY) illustrates CIT’s ability to grow earning assets while maintaining pricing discipline as well as the positive impact on margins from the substantial reduction in high cost debt achieved by the Company since reorganization.

Excluding restructuring charges and the previously announced Tyco Tax Agreement settlement, adjusted operating expenses were flat QoQ at $227 million. Nevertheless, operating expenses remain outside the Company’s target range of 2.00% - 2.50% of average earning assets. For 2014, DBRS expects CIT to make further progress towards this target through the rationalization of the international Vendor Finance platforms, cost reductions and asset growth.

CIT’s balance sheet strength remains sound underpinned by credit metrics that remain at cyclical lows, ample liquidity and solid capital. Liquidity was comprised of $8.8 billion cash and investment securities as well as $1.9 billion of unused and committed capacity under its revolving credit facility.

DBRS notes that in January 2014 CIT renewed its revolving facility, lowering the commitment to $1.5 billion, while extending the maturity to January 2017. Preliminary Tier 1 capital at year-end 2013 was 16.7%, well- above regulatory requirements.

DBRS rates CIT Group Inc.’s Issuer Rating at BB with a Positive trend.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States. All DBRS methodologies and criteria can be found on DBRS 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Approver: Alan G. Reid
Initial Rating Date: 17 May 2010
Most Recent Rating Update: 17 December 2012

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