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CIT Initiated at Neutral - Analyst Blog

We are initiating our coverage on CIT Group Inc. ( CIT ) with a long term Neutral recommendation. The company is poised to benefit from its strong capital and liquidity position.

However, sluggish growth in many industries, where CIT offers finance, could hamper its growth prospects. Hence, the company will have to focus on its top-line improvement; otherwise, its bottom-line will continue to remain under pressure.

Along with its subsidiaries, CIT provides commercial financing and leasing products and other services to small and middle market businesses across a wide range of industries. Back in November 2009, CIT filed for bankruptcy because of the further deterioration of its stressed liquidity position. However, since it recovered from the insolvency in December 2009, the company has been trying to expand its footprints through its businesses.

Since 2010, CIT has been lowering its debt structure by either eliminating or refinancing nearly $15 billion of first lien and second lien debt. In August, it announced a new revolving credit facility worth $2 billion. The joint lead arrangers and book-runners of this credit facility were BofA Merrill Lynch, a unit of Bank of America Corporation ( BAC ), Barclays Capital, a unit of Barclays PLC ( BCS ), and J.P. Morgan, a division of JPMorgan Chase &Co. ( JPM ).

We expect that the company's initiatives to restructure balance sheet and lower funding costs will support its future growth. This will also enable it to provide more flexible financing to small and mid-sized organizations.

Additionally, for improving profitability, CIT has been pushing down its operating expenses. The company's non-interest expenses declined by nearly 11% in the first nine months of 2011 compared with the prior-year period, mainly due to lower employee expenses. We expect the head count reduction to continue until the economic growth gains momentum, thereby supporting the bottom line to some extent.

Furthermore, we believe that CIT's top-line growth broadly depends on the macro-economic environment. Gradual revival of the global economy and domestic market will increase the demand for financing of inventories and capital equipments. Hence, this will allow CIT to witness higher earnings asset growth over the next several quarters.

On the flip side, CIT faces uncertainties on the regulatory front. Though the impact of the Dodd-Frank Wall Street Reform Act and Basel III liquidity regulation are still uncertain, we anticipate CIT's revenue growth and expenses to get affected negatively. Actually, all these could hurt the company's financials over the medium term.

Furthermore, though CIT is well capitalized, the company is not allowed to declare dividends under the terms of the Amended Credit Facility and the Second Lien Notes until such debt is not repaid. Hence, this is a big drawback for those investors who are looking for dividend as a part of the investment returns.

CIT currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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