DBRS Places CIT Under Review with Positive Implications Following OneWest Acquisition Announcement

DBRS, Inc. (DBRS) has today placed the ratings of CIT Group Inc. (CIT or the Company), including its Issuer Rating of BB, Under Review with Positive Implications. Today’s rating action follows the Company’s announcement that it has agreed to acquire OneWest Bank, N.A. (OneWest), a regional bank with approximately $23 billion in assets, for $3.4 billion in cash and common stock. Subject to customary regulatory approvals, the transaction is expected to close in 1H15.

The Under Review with Positive Implications reflects DBRS’s view that the acquisition makes strategic sense for CIT, as it enhances CIT’s strong commercial lending franchise, while providing an attractive branch banking franchise. As of June 30, 2014, OneWest had 73 branches in Southern California and $15 billion of deposits, of which $2.3 billion are commercial deposits. OneWest’s commercial businesses are complementary to CIT’s, strengthening the Company’s west coast presence, as well as certain industries including communications and technology, power, entertainment, energy and private equity. Importantly, OneWest’s cash management services provides CIT with products and services it previously was unable to offer its core commercial customers.

The Under Review with Positive Implications also considers that the acquisition will strengthen CIT’s overall funding profile by providing the Company with access to core retail deposits. As a result, on a pro-forma basis, deposits will be 57% of CIT’s total funding compared to 44% on a stand-alone basis at June 30, 2014, and 10% at year-end 2009. Moreover, CIT’s deposits will become more diverse and its cost of funding will be reduced, supporting future earnings. Importantly, the acquisition is expected to be accretive to earnings in the first year after closing and assumes cost savings that DBRS considers as clearly attainable. DBRS views the acquisition as having no immediate impact on CIT’s overall solid risk profile given that 67% of OneWest’s $9.0 billion legacy portfolio benefits from FDIC loss sharing agreements through 2020. While all acquisitions include a degree of integration risk, DBRS sees integration risks as manageable, as CIT will maintain OneWest’s existing branch network and infrastructure.

DBRS notes that with the closing of the acquisition CIT will have approximately $67 billion in assets and, as a result, become a systemically important financial institution (SIFI) subject to the Fed’s annual Comprehensive Capital Analysis and Review (CCAR) tests. While CIT has indicated that a certain degree of investment will be required to meet the regulatory requirements of a SIFI, DBRS views CIT as appropriately positioned to meet these requirements and considers the additional investments as manageable. Further, CIT expects upon closing of the acquisition that its Basel I Tier 1 common ratio will be in the range of 12.5% to 13.0%, well above regulatory requirements.

The review will focus on CIT’s future capital retention plans and the impact of the acquisition on CIT’s funding strategy and liquidity planning. Nevertheless, DBRS expects that CIT will continue to hold capital levels at the higher end of its peer group. During the review, DBRS will also assess the overall earnings impact of the acquisition, including the ability of CIT to capitalize on OneWest’s cash management services to improve fee income generation. Moreover, DBRS will review the OneWest commercial lending portfolio, which is to a degree unseasoned, to determine if performance expectations should differ from those of the CIT originated portfolio due to differences in credit underwriting. DBRS expects to conclude the review upon the transaction receiving regulatory approval.

The ratings of CIT’s Revolving Credit Facility (the Facility) remain at BBB (low), Stable trend as based on DBRS policy, the notching up from the Issuer Rating is limited to BBB (low) and, as such, the Issuer Ratings and Facility ratings potentially could converge to this rating level.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States (May 2008). Other applicable methodologies include Global Methodology for Rating Banks and Banking Organisations (June 2014) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014). These methodologies can be found at: http://www.dbrs.com/about/methodologies

The primary 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
Rating Committee Chair: Roger Lister
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.