DBRS Morningstar Places CIT Under Review Positive Following Merger Announcement with First Citizens

DBRS, Inc. (DBRS Morningstar) has placed the ratings of CIT Group Inc. (CIT or the Company) and its primary banking subsidiary, including the Company’s Long-Term Issuer Rating at BBB (low) and Short-Term Issuer Rating of R-2 (low), Under Review with Positive Implications. The ratings action follows the October 16th, 2020, announcement that the Company had entered into a merger of equals (MOE) agreement with First Citizens BancShares, Inc (First Citizens). The merger is expected to close in 1H21, and is subject to the approval of both entities’ shareholders, as well as customary regulatory approvals.

KEY RATING CONSIDERATIONS
The Under Review with Positive Implications reflects DBRS Morningstar’s view that the merger presents a compelling fit given the strong complementary strengths of the two institutions. Specifically, the transaction will overlay CIT’s leading national middle-market commercial lending franchise over First Citizens’ retail banking franchise in growing MSAs in the Southeast. Further, the combined entity will benefit from improved product diversity across both retail and commercial banking, as well as CIT’s solid direct banking franchise and homeowner association business. The enhanced scale, broader product set and increased geographic diversification combined with cost savings is expected to be benefit earnings generation and stability.

While DBRS Morningstar recognizes the strategic fit of the combination, we also note the substantial integration risk associated with such a large transaction, particularly as it relates to culture and organizational structure. Importantly, integration risk is further elevated, given the uncertain economic environment due to the ongoing Coronavirus Disease (COVID-19) pandemic, which is likely to present additional pressures on credit performance in 2021. These concerns are partially mitigated by both CIT’s and First Citizens’ proven track record of strengthening their respective franchises through selective acquisitions, as well as disciplined risk management. Moreover, both institutions are led by experienced management teams that will be fully engaged in the integration.

On a pro-forma basis, the combined company, will become the 19th largest U.S. bank, with over $100 billion in total assets. Further, the combined entity will benefit from CIT’s homeowner association business and growing direct bank franchise along with First Citizens’ retail products, including credit cards and mortgages. We anticipate that the combination will provide significant revenue growth opportunities, especially on the other side of the current challenging economic environment, as well as cost savings opportunities. Indeed, the company has identified approximately 10% in targeted pro-forma combined non-interest expense savings.

Importantly, credit fundamentals are expected to remain sound. The combined entity is expected to have a CET1 ratio of 9.4% or greater at closing. Moreover, the funding and liquidity profile will be meaningfully improved with a greater reliance on low-cost retail deposits. Finally, we consider the gross loan mark to be conservative at 2.6% of CIT’s loans and leases, excluding rail assets.

The Under Review with Positive Implications status is generally resolved with a rating action within three months. However, DBRS Morningstar expects to conclude the review once the MOE closes in 1H21.

RATING DRIVERS
The closing of the merger transaction with First Citizens BancShares on terms consistent with those announced would lead to the ratings being upgraded. If the MOE does not close as expected, CIT’s ratings would revert back to a Negative trend. The ratings would be downgraded if the MOE does not close and CIT experiences sustained asset quality deterioration, or prolonged negative operating leverage.

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 8, 2020): https://www.dbrsmorningstar.com/research/362170/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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