DBRS: CIT’s 1Q14 Results Lower QoQ on Weaker Adjusted Revenues; Solid Growth in Funded Volumes

Summary:
• CIT’s 1Q14 earnings were lower quarter-on-quarter (QoQ) on lower adjusted revenues, largely stable underlying operating expense and higher provisions for loan losses.
• Despite the slow growth economic environment, funded volumes grew 28% year-on-year (YoY)
• 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) 1Q14 results as acceptable, as margin compression and the higher cost of credit impacted results. For the quarter, CIT reported net income of $109.1 million compared to $129.9 million in the prior quarter. Nevertheless, from DBRS’s perspective, the solid expansion in funded volumes across all business lines in an intensely competitive marketplace continues to demonstrate the strength of the Company’s commercial lending franchise. CIT generated $2.5 billion of new funded volumes, in the quarter, a 28% YoY increase. As a result of the expansion in overall volumes, total earning assets, excluding the non-strategic portfolio, were 11% higher YoY and 4% higher QoQ at $32.7 billion.

Despite growth in earning assets, DBRS - calculated adjusted total revenues were 17% lower QoQ at $394 million as reduced margins resulted in lower net finance revenue, and non-interest income declined. Net finance revenues were $324 million down from $337 million in the prior quarter, reflecting higher expenses related to the remarketing of aircraft subject to lease expirations, suspension of FSA accretion related to the recently sold student loan portfolio, and modestly higher interest expense. Positively, pressure from these items was partially offset by higher revenue on earning assets, illustrating that CIT is maintaining good price discipline on new lending. DBRS notes that while elevated levels of maintenance expense related to the aircraft leasing portfolio will impact finance revenues over the next couple of quarters, 75% of the aircraft with lease expirations in 2014 already have commitments, greatly reducing the potential of loss revenue due to “aircraft on the ground”. Lower fee revenue reflecting subdued middle market M&A activity and a decrease in gains on sale were the primary contributors to the decline in adjusted non-interest income.

Although credit metrics remain at cyclical lows, provision for credit losses increased to $37 million in 1Q14, up from $14 million in the prior quarter. Asset growth and a loss on a client account in the international portfolio combined with lower recoveries drove the increase in cost of credit. Given the one-time nature of the client loss and trends in credit performance, DBRS expects the level of provisioning to return to those of prior quarters going forward.

CIT’s balance sheet remains solid, anchored by a balanced funding profile and solid capital. Deposits grew $0.7 billion in the quarter to $13.2 billion. Pro-forma to the sale of the student loan portfolio, deposits account for approximately 40% of total funding. As expected, the Company’s preliminary Basel I Tier 1 capital ratio was lower from year-end 2013 at 16.1%, a 60 basis point reduction, but still well above regulatory requirements. DBRS notes that CIT’s Board of Directors authorized an additional $300 million of share repurchases through December 31, 2014, bringing the total authorization up to $607 million. As of April 2014, CIT had repurchased $211 million of common stock.

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.