DBRS: CIT’s 3Q14 Results Higher on Reversal of Tax-Related Valuation Allowance, Underlying Lower

Summary:
• Net income was $514.9 million, up from $246.9 million in the prior quarter driven by a $375 million partial reversal of the Company’s tax-related valuation allowance.
• Underlying pre-tax income lower on higher credit costs, slightly higher operating expenses and lower non-interest income.
• DBRS rates CIT Group Inc. Issuer Rating at BB, Under Review with Positive Implications.

DBRS, Inc. (DBRS) considers CIT Group Inc.’s (CIT or the Company) 3Q14 results as solid. CIT reported net income of $514.9 million, up from $246.9 million in the prior quarter benefiting from a $375 million partial reversal of the tax-related valuation allowance. On an underlying basis, excluding restructuring expenses and the impact of portfolio repositioning, pre-tax income from continuing operations totaled $182 million in 3Q14, down from $229 million in the prior quarter. The sequential decline was attributable to lower other income, higher credit costs and slightly higher operating expenses. Nevertheless, DBRS sees stable finance margins, good growth in funded volumes, sound liquidity and strong asset quality as supportive of the current rating.

Funded volumes were 16% higher YoY (year-on-year), but modestly lower QoQ (quarter-on-quarter) reflecting seasonality and the lumpiness of aircraft deliveries. Solid funded volumes and the closing of the Direct Capital Corporation acquisition in the quarter resulted in a 4% QoQ increase in financing and leasing assets, excluding non-strategic assets, to $35.5 billion. Higher earning asset balances and stable margins resulted in net finance revenue increasing modestly on a sequential quarter basis. Other income, excluding impairment charges on assets held for sale, the acceleration of counterparty receivable accretion and fair value of derivatives was 11% higher QoQ. Growth in factoring commissions on higher volumes, an increase in gain on sale of leasing equipment driven by the sale of railcars, and slightly higher fee revenue generation in corporate finance were the primary contributors to the underlying increase.

Operating expenses, excluding restructuring expenses, were 3% higher QoQ primarily due to the acquisition of Direct Capital. As a percentage of average earning assets, operating expenses, exclusive of restructuring were 2.63%, essentially unchanged QoQ, but still outside of the Company’s near-term target range of 2.00% to 2.50%.

CIT”s credit performance remains sound, reflecting net charge-offs that remain near cyclical lows and non-accruals were slightly higher on a linked quarter basis. Although credit metrics remain at cyclical lows, higher non-specific reserves driven by asset growth resulted in the majority of the increase in the provision for credit losses to $38.2 million in 3Q14, up from $10.2 million in the prior quarter.

Lastly, regulatory capital ratios were lower QoQ, reflecting growth in the aircraft order book during the quarter as well as asset growth. Nonetheless, regulatory capital ratios remain strong with CIT reporting preliminary Basel I Tier 1 capital ratio of 14.3%.

DBRS rates CIT Group Inc.’s Issuer Rating at BB. The ratings are currently Under Review with Positive Implications. The Review reflects CIT’s agreement to acquire OneWest Bank, which is expected to close in 1H15, subject to regulatory approval.

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