DBRS Confirms CIT Group at BB (high), Upgrades CIT Bank to BBB (low); Trend Stable on All Ratings

DBRS, Inc. (DBRS) confirmed the BB (high) Long-Term Issuer Rating of CIT Group Inc. (CIT or the Company) and assigned a Short-Term Issuer Rating of R-4 to CIT. Concurrently, DBRS upgraded the Long-Term Issuer Rating of CIT Bank, N.A. (the Bank) to BBB (low), and assigned a Short-Term Issuer Rating of R-2 (middle) to the Bank. The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is BBB (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The ratings action reflects the progress CIT has made in its transformation to a bank-oriented operating model. With the sale of CIT Aerospace completed in April 2017, 82% of CIT’s assets are now held in the Bank, while 78% of total funding is sourced through deposits. Further, the material reduction of unsecured debt at the bank holding company, significantly reduces structural subordination. As a result, the upgrade of the Bank results in the Bank being rated one-notch above the bank holding company, which is standard DBRS policy for stand-alone bank holding companies. Moreover, the ratings reflect CIT’s well-established commercial lending franchise that has been developed over more than 100 years of lending to U.S. middle market companies. The ratings also consider the Company’s strong and disciplined risk management function, as well as robust regulatory capital. These factors are offset by an earnings generation ability that, while strengthening, continues to trail regional bank peers, as well as a deposit base whose quality is viewed as below average.

The Stable trend on the ratings reflects DBRS’s expectations that CIT will continue to generate solid financial results in 2H17 and into 2018 supported by a still growing U.S. economy and expected further progress on cost savings initiatives. Moreover, DBRS expects further improvements in the quality of the deposit base.

CIT’s franchise strength as a leading player in the commercial lending marketplace is a key factor in the ratings. Indeed, CIT has a broad market presence established over its more than 100 years of lending to U.S. middle market companies. At June 30, 2017, the Company’s total assets of $50.5 billion were 21% lower than at year-end 2016, reflecting the sale of CIT Aerospace in April 2017. Total financing and leasing assets from continuing operations were 1.5% lower during 1H17. However, total new business volumes were 13.7% lower YoY in 1H17 at $4.0 billion, reflecting lower residential mortgage volumes, as well as reduced demand for commercial loans from middle market companies due to ongoing uncertainty related to tax and healthcare reform. Positively, funded volumes grew sequentially in 2Q17. Going forward, DBRS will look for consistent commercial loan growth as further evidence that the Company’s franchise remains sound and that the benefits of the transformation to a commercial bank operating model are being captured.

DBRS considers strengthening and sustaining earnings generation and returns to levels more in line with peers is critical for upward ratings migration. For 1H17, CIT reported pre-tax income from continuing operations of $143.7 million, compared to $304.6 million in the comparable period a year ago. 1H17 results were impacted by losses associated with the extinguishment of corporate debt. Excluding these costs, 1H17 adjusted pre-tax income from continuing operations was $308.5 million, a slight increase from 1H16. The Company has made sound progress in its initiative to remove $150 million of operating expenses by year-end 2018. Indeed, operating expenses were 5% lower year-on-year in 1H17. Meanwhile, net finance margin (NFR), excluding noteworthy items, declined 14 basis points in 1H17 to 3.51% from a year ago. The reduction in the NFR margin reflects allocation of interest expense, lower yields in Rail Finance, elevated prepayment activity, partially offset by higher purchase accounting accretion, and an increase in investment income from the growing securities portfolio.

From DBRS’s perspective, the Company’s balance sheet is sound, underpinned by asset quality metrics that remain near cyclical lows and a well-managed funding and liquidity profile. Indeed, non-accruals and charge-offs remain at very low levels, while exposures to more troubled industries, including oil & gas, retail and maritime remain very manageable. Liquidity is ample and more than sufficient to cover near-term maturities, which have been materially reduced following the accelerated redemption and repayment of corporate debt with proceeds from the sale of CIT Aerospace. Indeed, pro-forma to the September 2017 tender offer, the Company has no corporate debt maturities until February 2019 ($1.4 billion). As of June 30, 2017, deposits accounted for 78% of total funding compared to 68% a year ago. While the improving funding profile is viewed favorably by DBRS, upward ratings movement is predicated on additional progress made in improving the quality of the deposit base, of which 50% comprised of time deposits as of June 30, 2017.

DBRS views regulatory capital as robust despite capital actions taken by CIT following the sale of CIT Aerospace. At June 30, 2017, CIT’s fully phased-in Basel III Common Equity Tier 1 (CET1) ratio was 14.4%. However, DBRS does not anticipate that regulatory capital ratios will be maintained at the current levels. Over-time, DBRS expects that CIT will look to further optimize capital either through acquisitions, or by returning it to shareholders with the Company targeting an eventual Basel III Common Equity Tier 1 (CET1) target ratio of 10%-11% by 2018. DBRS notes that this target would be in line with the Company’s regional bank peers.

Concurrent with the rating action, DBRS 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.

RATING DRIVERS
Further progress in the evolution of the franchise to a commercial bank for the U.S. middle market that is accompanied by consistent loan growth, as well as by sustained improvement in earnings could result in upward ratings pressure. Continued progress in expanding the contribution of funding from deposits, while improving the overall quality of the deposit base would also be viewed favorably. Conversely, a prolonged deterioration in operating results; particularly if indicative of an excessive risk appetite or weakness in risk management could result in ratings being pressured. Further, sustained outflows of deposits resulting in a reversal of the improvement in the funding profile, or an aggressive return of capital or an acquisition considered outside CIT’s commercial lending focus could also lead to ratings being lowered.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under 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.

Lead Analyst: David Laterza, Senior Vice President, Head of U.S. Non-Bank FIG, Global FIG
Rating Committee Chair: Michael Driscoll, Head of North American FIG, Global FIG
Initial Rating Date: May 27, 2010
Last Rating Date: June 5, 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.