DBRS Confirms CIT Group at BB (high), Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of CIT Group Inc. (CIT or the Company), including the Company’s Long-Term Issuer Rating of BB (high) and Short-Term Issuer Rating of R-4. At the same time, DBRS confirmed the ratings of its primary banking subsidiary, CIT Bank, N.A. (the Bank). The trend on all ratings was revised to Positive, with the exception of the Revolving Credit Facility rating of BBB (low), which remains 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.

KEY RATING CONSIDERATIONS
The change in trend to Positive reflects DBRS’s expectations that CIT will make additional progress in improving its operating efficiency, as well as the quality of its deposit base. DBRS anticipates that these improvements combined with sound new business volumes will underpin improving underlying returns and be supportive of an upgrade. DBRS expects improved underlying trends even with the expected exit from the European rail and the reverse mortgage businesses in 2018.

The rating confirmation reflects CIT’s well-established commercial lending franchise to the U.S. middle market and small businesses. The Company’s sound balance sheet is underpinned by a strong and disciplined risk management function, well-managed liquidity, and an improving funding profile that is significantly more deposit oriented. While currently high, DBRS expects capital to trend down towards the upper-end of CIT’s target Basel III fully phased-in Common Equity Tier 1 ratio range of 10%-11% over time, which would still remain firmly above the U.S. regional bank peer average. The ratings also consider the Company’s deposit base as below average, albeit improving, as well as, CIT’s returns, that still trail the Company’s U.S. regional bank peers. DBRS sees these as the most important challenges facing CIT, and key factors in upward movement in the ratings.

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, resulting in a sustainable 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 through a higher proportion of non-maturity deposits would also be viewed favorably.

Conversely, a sustained deterioration in operating results; particularly as a result of a material increase in provisions for credit losses indicative of an excessive risk appetite or weakness in risk management could result in the trend reverting back to Stable. Further, sustained outflows of deposits resulting in a reversal of the improvement in the funding profile, or an aggressive return of capital could also lead to negative ratings pressure.

RATING RATIONALE
CIT’s well-established commercial lending franchise is a key factor in the ratings. With a history of lending to U.S. middle market companies and small businesses for more than 100 years, CIT has a well-developed brand and deep customer relationships that are supported by the Company’s broad product offering and wide range of services. DBRS sees these strengths, as well as the Company’s national lending footprint as anchoring the Company’s strong competitive position. Positively, origination volumes in CIT’s core business (excluding factoring) totaled $3.3 billion in 4Q17, up 47% sequentially, and the highest level in more than eight quarters. DBRS sees the strengthening volumes as an early indication that the investments being made by CIT to broaden the Company’s product and services offerings, and deepen relationships are beginning to flow through to the business. DBRS expects that despite competitive headwinds in lending to the U.S. middle market, CIT will continue to originate sound new business volumes in 2018.

CIT’s recent earnings generation and returns have lagged the U.S. regional bank peer group. Over the next twelve months, DBRS expects that the Company will make progress in strengthening underlying earnings. Revenues and net finance margins are expected to be impacted by the anticipated sales of the European rail business, as well as the reverse mortgage business in 2018. Nevertheless, DBRS sees underlying trends in earnings as benefiting from solid new business volumes, rising interest rates, and further progress in developing the deposit base. Additional progress towards the Company’s initiative to remove $150 million of operating expenses by year-end 2018 should also drive earnings improvement. Operating efficiency, excluding noteworthy items, for 2017 was 56.3%, a 130 basis point improvement from 2016, moving towards the Company’s target of mid-50% by the end of 2018.

While lending to middle market companies and small businesses is inherently riskier than lending to large corporates, CIT’s deep expertise in lending into this market along with a robust risk management function, well-articulated risk appetite and sound servicing capabilities are illustrated in the strong asset performance. Non-accruals and charge-offs remain near cyclically low levels. At year-end 2017, non-accrual loans totaled $220.9 million, 21% lower than at year-end 2016, and 0.76% of total finance receivables. Given the maturing credit cycle, DBRS anticipates that asset quality metrics in 2018 may begin migrating towards a more normalized level but will remain well within DBRS’s tolerance levels for the rating.

From DBRS’s perspective, CIT’s liquidity is ample and well-managed. CIT’s modified liquidity coverage ratio exceeded 100% at December 31, 2017. Maturities over the next two years are very modest with just $500 million of senior notes due in February 2019. CIT continues to make progress in reducing its reliance on wholesale sourced funding. As of December 31, 2017, deposits accounted for 77% of total funding compared to 68% a year ago. DBRS anticipates additional progress will be made in improving the quality of the deposit base, including reducing the presence of time deposits, which comprised a high 49% of total deposits at year-end 2017.

Regulatory capital remains sound despite capital actions taken by CIT following the sale of CIT Aerospace. At December 31, 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. DBRS expects that CIT will look to further optimize capital, subject to regulatory approval, with the Company’s Basel III CET1 migrating towards the upper-end of the 10%-11% range. DBRS notes that this target would be in line with the Company’s regional bank peers and consistent with a higher rating, if sustained.

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.

The Grid Summary Scores for CIT are as follows: Franchise Strength – Good/Moderate; Earnings Power – Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good/Moderate; Capitalisation – Good/Moderate.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2018), 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: March 8, 2018

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.

For more information on this credit or on this industry, visit www.dbrs.com.