DBRS Upgrades CIT Group Inc. to BB (high) Trend Stable, Assigns Ratings to CIT Bank, N.A.

DBRS, Inc. (DBRS) has today upgraded the Issuer and Unsecured Long-Term debt ratings of CIT Group Inc. (CIT or the Company) to BB (high) from BB. Concurrently, the Short-Term Instruments rating was confirmed at R-4. Additionally, DBRS has assigned a Senior Debt and Deposits rating of BB (high) to CIT Bank, N.A. The trend on all ratings is Stable. As a result of today’s rating action, the ratings have been removed from Under Review with Positive Implications where they were placed on July 24, 2014.

The rating action reflects the Company’s diverse commercial franchise, which benefits from leading positions in aircraft leasing, railcar leasing, and factoring. Further, the rating action also considers CIT’s recent acquisition of OneWest Bank (OneWest) and the positive impact the acquisition will have on the Company’s funding profile and franchise. Moreover, the Company’s sound risk management and servicing capabilities and appropriate capital levels are factored into the ratings. These positive factors are offset by integration and execution risks that are present in the OneWest acquisition, the Company’s still-elevated reliance on wholesale funding, and operating performance that continues to be more volatile than peers with below average returns.

The Stable trend reflects DBRS’s expectations that CIT will continue to generate solid operating results despite a persistently challenging environment for U.S. middle market companies, including a mixed U.S. economy and heightened concerns regarding global markets and the potential impact on the tepid U.S. economic recovery. Strengthening earnings including an improved contribution from fee income related sources and improving operating efficiency while successfully integrating OneWest could have positive rating implications. Continued progress in reducing reliance on wholesale funding while improving the overall quality of the deposit base and navigating a rising rate environment would be viewed favorably. While DBRS has tolerance for normalization of credit metrics, sustaining solid credit performance and maintenance of appropriate capital levels are requirements for upward ratings migration. Conversely, a sustained deterioration in operating results could have negative pressure on ratings. An inability to successfully integrate OneWest evidenced by meaningful outflows of deposits or outsized costs could result in negative ratings pressure.

Overall, DBRS views the OneWest acquisition as enhancing CIT’s strong commercial lending franchise, while strengthening and diversifying the Company’s deposit base through an attractive branch banking franchise. DBRS sees OneWest’s commercial businesses as complementary to CIT’s, strengthening the Company’s West Coast presence, as well as certain industries. Importantly, OneWest’s cash management services and commercial deposit platform provides CIT with products and services it previously was unable to offer its core commercial customers. As of June 30, 2015, OneWest had approximately 70 branches in Southern California and $14.9 billion of deposits. However, DBRS notes that OneWest’s deposit book is potentially more sensitive to rising interest rates given the high proportion of time deposits, which were 42% of total deposits at June 30, 2015.

From DBRS’s perspective, strengthening earnings generation will be key for further upward ratings migration. For 1H15, CIT reported pre-tax income from continuing operations of $300.7 million, 12% lower YoY. Results continue to be constrained by weak performance in the Corporate Finance business, which has been adversely affected by reduced activity among middle market companies, as well as increased competition. Higher operating expenses ahead of the OneWest acquisition and an increase in provisioning expense due to growth in the loan portfolio have also contributed to the subdued, but still acceptable operating results. Positively, net finance revenue and margins remain stable, which DBRS sees as demonstrating the benefits of the low cost deposit base as well as CIT maintaining pricing discipline despite the competitive environment. DBRS will look for CIT’s earnings to strengthen as margins improve supported by the addition of OneWest’s lower cost deposits and the realization of cost synergies post-merger.

CIT continues to maintain a solid balance sheet supported by credit metrics that remain at or near cyclical lows and an improving liquidity and funding profile. Non-accruals and charge-offs remain at low levels. Meanwhile, liquidity is ample and more than sufficient to cover near-term maturities, which are manageable with no unsecured debt maturities until 2017 ($3.0 billion). Moreover, CIT’s evolution to a more bank-centric funding model continues and will be further enabled by the OneWest acquisition. As of June 30, 2015, deposits accounted for 51% of total funding, 17% secured wholesale funding and 32% unsecured funding. Pro-forma to the OneWest acquisition, deposits will constitute over 60% of total funding.

DBRS views regulatory capital as appropriate with CIT reporting a fully phased-in Basel III Common Equity Tier (CET) 1 ratio of 14.4% at the end of June 2015, on the standardized approach. Following the OneWest acquisition, CIT expects its Basel III CET1 ratio to be between 12.5% to 13.0%, on a transitional basis.

CIT Bank, N.A.’s Deposit and Senior Debt rating of BB (high) is equal with CIT’s reflecting that a significant portion of assets and earnings are still generated outside of the Bank. At June 30, 2015, approximately 47% of total Company assets were held at the Bank, while the Bank accounted for 37% of 1H15 pre-tax income. DBRS notes that approximately 78% of total new funded volumes, excluding factoring, in 1H15 were originated in the Bank. DBRS notes that CIT Bank currently has no senior debt outstanding.

Concurrent with today’s rating action, DBRS has confirmed the BBB (low) rating of the Revolving Credit Facility (the Facility), which is one notch above the Company’s Issuer Rating. The notching reflects DBRS’s view that while the facility is unsecured, recovery, in the case of default, will be greater than 80%. This view on the recovery reflects the upstream guarantee in place from eight operating subsidiaries of CIT for the benefit of the Facility. The Stable trend reflects that the notching on the instrument will narrow and eventually be eliminated as the Issuer Rating strengthens. Based on DBRS policy, the notching up from the Issuer Rating based on the recovery analysis described above is limited on the Revolving Credit Facility to BBB (low). As such, the Issuer Rating 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 the Global Methodology for Rating Finance Companies (October 2014). Other applicable methodologies include the Global Methodology for Rating Banks and Banking Organisations (June 2015), DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2015), DBRS Criteria – Support Assessments for Banks and Banking Organization (March 2015) and DBRS Criteria - Guarantees and Other Forms of Explicit Support (February 2015). These 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: 27 May 2010
Most Recent Rating Update: 23 July 2014

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