CIT Group Inc. (CIT) reported its first-quarter 2012 loss of $2.22 per share, much more than the Zacks Consensus Estimate loss of $1.54. The company had reported earnings of 22 cents in the prior quarter and 33 cents the prior-year quarter.
Negative net revenue, higher interest expenses and increase in operating expenses negatively impacted CIT’s quarterly results. However, continuously improving credit quality and stable capital ratios were the positives.
CIT recorded a net loss of $446.5 million in the quarter under review compared with a net income of $43.6 million in the preceding quarter and net income of $65.6 million in the year-ago quarter.
Behind the Headline
On a non-GAAP basis, CIT reported negative total net revenue of $116.9 million compared with positive net revenue of $305.8 million in the previous quarter and $459.3 million in the prior-year quarter. Negative net finance revenue was the primary reason for the company’s negative revenue in the quarter. Moreover, net revenues were nowhere near the Zacks Consensus Estimate of $1,047.0 million.
CIT’s net interest revenue in the first-quarter was negative $668.1 million compared with negative $194.1 million in the prior quarter and negative $59.8 million in the year-ago quarter. A much lower total interest income more than offset the increase in total interest expenses. The major reason for the higher interest expenses was the redemption of nearly $6.5 billion of high cost debt by CIT during the quarter.
Net finance revenue as a percentage of average earning assets (excluding fresh start accounting and debt prepayment penalties) deteriorated 10 basis points (bps) sequentially but improved 56 bps year over year to 1.97%. The rise was driven by lower funding costs.
Considering restructuring charges of $5 million in the reported quarter, operating expenses stood at $223 million. Excluding these charges, operating expenses increased 1% sequentially and 10% from the prior-year quarter, driven by higher compensation costs partly offset by lower professional fees.
Credit Quality
CIT’s credit quality continued to improve during the first-quarter with almost all the major metrics declining. Net charge-offs (NCOs) were $22 million, down from $24 million in the prior quarter and $140 million in the prior-year quarter. The reduction was driven mainly by a decline in NCOs in Corporate Finance. NCOs as a percentage of average finance receivables decreased 3 bps sequentially and 190 bps year over year to 0.42%.
CIT’s non-accrual loans dropped 31% sequentially and 63% year over year to $482 million. Non-accruing loans as a percentage of finance receivables slipped 118 bps sequentially and 314 bps year over year to 2.35%.
Further, with continued reduction in specific reserves and improved portfolio credit quality, provision for credit losses was a benefit of $42.6 million compared with $15.8 million in the last quarter and $122.4 million in the prior-year quarter.
Balance Sheet and Capital Ratios
As of March 31, 2012, cash and short-term investment securities were $7.3 billion, consisting of $6.3 billion of cash and $1.0 billion of short-term investments.
CIT continues with its restructuring initiatives to lower its cost of capital and improve profitability. Since January 2010, the company has eliminated or refinanced over $23.5 billion of high cost first and second lien debt. This consists of $7.5 billion of first lien debt, its entire $12.3 billion of Series A notes, $2.1 billion of Series B notes and $1.6 billion of Series C notes.
Additionally, on April 2, CIT announced that it would redeem $500 million of its 7% Series C Notes maturing in 2017 on May 2, 2012. Following the completion of this redemption, nearly $6.7 billion of debt would be left pertaining to the Series C notes in the company’s balance sheet along with unsecured revolving credit facility.
Capital ratios were stable as of March 31, 2012, with a Tier 1 capital ratio of 17.6% and a total capital ratio of 18.5%, both down from the prior quarter end. Book value per share was $42.09 as of March 31, 2012 compared with $44.30 as of December 31, 2011.
Our Viewpoint
We expect 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, it would also lead to an improvement in its net interest margin and profitability. Also, bringing down the cost of debt will help CIT to be flexible in providing much needed financing to the small and mid-sized organizations. Moreover, the company is also poised to benefit from its strong capital and liquidity position.
However, sluggish growth across the economy could mar the company’s growth prospects. Furthermore, CIT will have to focus on the top-line improvement; otherwise, its bottom line will continue to remain under pressure.
One of CIT’s peers, CapitalSource Inc. (CSE) is scheduled to announce its first-quarter results on April 30.
CIT currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
CIT GROUP (CIT): Free Stock Analysis Report
CAPITALSOURCE (CSE): Free Stock Analysis Report
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