DBRS Morningstar Confirms CIT Group at BBB (low), Trend Revised to Negative

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of CIT Group Inc. (CIT or the Company), including the Company’s Long-Term Issuer Rating at BBB (low) and the ratings of CIT Bank, N.A., its primary banking subsidiary, at BBB. The trend on all ratings has been revised to Negative from Stable. The Intrinsic Assessment (IA) for the Bank is BBB, 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 Negative trend reflects the wide and growing scale of the economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, which is pressuring CIT’s earnings and asset quality and will likely have a greater impact in the coming quarter. We expect a continued elevated level of loan loss provisions and pressure on the net interest margin, which will reduce the Company’s profitability. We also see the Company’s exposures to higher risk sectors and businesses could present an increased risk to capitalization if the coronavirus-related downturn continues for an extended period. Nevertheless, unprecedented support measures have been put in place through monetary and fiscal stimulus, as well as relaxed criteria from regulators, which, in our view, could help mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, additional ratings pressure is likely.

The confirmation of CIT’s ratings reflects its strong middle-market commercial lending franchise, and CIT’s long track record and expertise in this space. We recognize the Company’s sound balance sheet fundamentals, disciplined risk management, and well-managed liquidity. Furthermore, CIT’s funding profile has been improved when compared to the prior crisis, with increased deposit funding and limited short-term wholesale funding. While we see this pandemic as potentially testing the stickiness of CIT’s online deposit base, we see the Mutual of Omaha Bank (Mutual) acquisition enhancing CIT’s stable, cost-efficient deposit base through increased branch, commercial and homeowners’ association (HOA) deposits.

RATING DRIVERS
A prolonged adverse economic downturn resulting in sustained asset quality deterioration, or prolonged negative operating leverage, could result in a ratings downgrade.

Given the Negative trend, an upgrade of the ratings is not currently anticipated. However, DBRS Morningstar could revise the trend back to Stable if the economic fallout from the coronavirus pandemic is not prolonged and outsized credit losses do not materialize.

RATING RATIONALE
CIT’s well-established commercial lending franchise is a key factor in its 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. The acquisition of Mutual, which closed on January 1, 2020, added about $8 billion of total assets, or 16% of CIT’s total assets. We see Mutual’s commercial banking business as providing a strong complement to CIT’s existing franchise with financial centers that supplement CIT’s presence.

While CIT’s earnings have been demonstrating improving trends, the recent abrupt coronavirus-related downturn has had a considerable impact on profitability. CIT reported a net loss of $624 million in 1Q20. Results included a significant $469 million provision for credit losses, up from $23 million in the prior quarter, reflecting a reserve build related to the implementation of Current Expected Credit Loss (CECL) and the impact of the coronavirus. It was the inaugural quarter for CECL, a forward-looking impairment approach that requires banks to book lifetime loan losses on the first day of origination (DBRS Morningstar: CECL Implementation Unlikely to Impact Bank Ratings: https://www.dbrsmorningstar.com/research/355513/dbrs-morningstar-cecl-implementation-unlikely-to-impact-bank-ratings). Also contributing to the loss was a $339 million after-tax goodwill impairment related to the OneWest Bank acquisition completed in August 2015. We expect CIT’s earnings to be significantly challenged in the coming quarter. The Company’s ability to navigate the current environment by absorbing credit costs through earnings while showing sequential improvement in earnings in the second half of 2020 will be key to the ratings returning to a Stable trend.

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 strong asset performance. Non-accruals and net charge-offs remain at low levels. As of 1Q20, non-accrual loans were 1.0% and net charge offs were at 0.57% of average loans. We expect these credit metrics to worsen in 2Q20, particularly for loans in sectors more impacted by the downturn such as retail, oil & gas, travel and restaurants/franchise finance. CIT is actively working with its customers on forbearance measures including payment deferrals, waived fees, and offering banking and structuring expertise. While we view these measures as prudent and likely to lead to lower overall losses through the downturn, we still expect losses for 2020 to be sizeable and have uncertainty around the Company’s ability to generate sufficient earnings to absorb these losses.

CIT’s funding and liquidity profile is good. About 84% of total funding is comprised of deposits, which have been enhanced with the Mutual acquisition. The Mutual acquisition added about $7 billion in deposits, of which close to $5 billion are HOA deposits from more than 31,000 community associations nationwide. Approximately $2 billion of deposits are sources from Mutual’s commercial and consumer financial centers in key markets. We see these relationship-based deposits as enhancing CIT’s funding profile and providing a platform for growth. Long-term debt maturities are well-laddered at the Company with modest maturities over the coming years, and no near-term senior debt maturities. At March 31, 2020, liquid assets were $9.5 billion, including HQLA and cash, or about 16% of total assets. Including contingent liquidity resources, such as FHLB borrowing and revolver availability, liquidity sources increase to a substantial 22% of total assets.

CIT’s capital levels have declined YoY, having started this year with lower levels due to the Mutual acquisition followed by some capital erosion with the 1Q20 loss. CIT reported a CET1 ratio of 9.7% at the end of 1Q20, which remains above its regulatory requirement of 7.0%. With the Mutual acquisition, CIT agreed with regulators to suspend share repurchases and build capital through retained earnings to reach a 10.5% CET1 ratio within 12 months. We see CIT’s ability to build capital through retained earnings as being a more challenging task than expected given the current environment.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019): https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include company documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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