CIT Group Inc.
) third quarter 2012 loss came in at 1.52 per share compared with
the Zacks Consensus Estimate loss of $1.08. The company had
reported a loss of 16 cents in the prior-year quarter. The
results include debt refinancing charges related to the
redemption of high-cost debt.
Negative net revenue, higher interest expense and rise in
operating expenses adversely impacted CIT's results.
Nevertheless, continuously improving credit quality and stable
capital ratios were the highlights of the quarter.
CIT recorded a net loss of $305 million in the quarter under
review, compared with 32.8 million in the year-ago quarter.
Performance in Detail
On a non-GAAP basis, total net revenue was a negative $46.9
million compared with positive revenue of $472.2 million in the
previous-year quarter. Negative net finance revenue was the
primary reason for the negative total net revenue. Moreover, net
revenues were nowhere near the Zacks Consensus Estimate of $760.0
Net interest revenue was a negative $438.0 million in the
reported quarter compared with a negative $100.3 million in the
year-ago quarter. The main reason for the negative net interest
revenue was surging interest expense.
Further, total non-interest income stood at $525.6 million, down
19.4% year over year. The fall was mainly due to lower other
Net finance revenue as a percentage of average earning assets
(excluding fresh start accounting and debt prepayment penalties)
improved 139 basis points (bps) year over year to 2.97%. The rise
was driven mainly by lower funding costs as well as reduction of
Operating expenses were $237.5 million, rising 4.9% from $226.4
million in the prior-year quarter and included $5 million of
restructuring charges. The jump was largely attributable to
increase in costs related to raising deposits and higher
technology costs, partially offset by decline in professional
CIT's credit quality continued to improve during the reported
quarter with almost all the major metrics declining. Net
charge-offs (NCOs) were $18 million, down from $46 million in the
prior-year quarter. NCOs as a percentage of average finance
receivables declined 47 bps year over year to 0.36%.
Moreover, non-accrual loans dropped 54.9% year over year to $412
million. Non-accruing loans as a percentage of finance
receivables slipped 363 bps year over year to 2.48%.
Further, there was no provision for credit losses in the third
quarter. This favorable trend reflects the overall improvement in
Balance Sheet Updates
As of September 30, 2012, cash and short-term investment
securities were $7.2 billion, consisting of $6.5 billion of cash
and $0.7 billion of short-term investments. Additionally, CIT had
approximately $1.4 billion of unused and committed liquidity
under a $2 billion revolving credit facility as of September 30,
Moreover during the reported quarter, CIT issued senior unsecured
notes worth $3 billion. Of the total, $1.75 billion worth of
senior notes are due in 2017 and the remaining worth $1.25
billion is due in 2022.
Since CIT emerged from bankruptcy in December 2009, it has been
constantly restructuring its balance sheet in order to bring down
its cost of capital as well as improve profitability. Since
January 2010, the company has either eliminated or refinanced
over $31 billion of high-cost first and second lien debt. Hence,
there is no high-cost debt left in the company's balance sheet,
except for the unsecured revolving credit facility.
Capital ratios were stable as of September 30, 2012, with a Tier
1 capital ratio of 16.7% and a total capital ratio of 17.5%, both
showing marginal deterioration from the end of the prior quarter.
Book value per share was $40.26 as of September 30, 2012 compared
with $44.32 as of September 30, 2011.
CIT's initiatives to restructure its balance sheet as well as
repay and refinance its costly debt will not only bring down the
funding costs, but also would lead to an improvement in its net
interest margin as well as profitability. Moreover, the company
is poised to benefit from its strong capital and liquidity
However, CIT's growth prospects will likely be adversely impacted
by sluggish growth in the industries where the company provides
finance, stringent regulations as well as the weak economic
recovery. Further, the company will have to focus on improving
its top line; otherwise, its bottom line will continue to remain
CIT currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term 'Neutral' recommendation on the stock.
One of CIT's peers,
) is expected to announce its third quarter results on October
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