A substantial increase in expenses led CIT Group Inc.'s CIT third-quarter 2015 adjusted earnings from continuing operations of 26 cents per share, which significantly lagged the Zacks Consensus Estimate of 75 cents. Also, the figure came 65.3% below the year-ago tally.
Results were adversely impacted by substantially higher operating expenses and a rise in provision for credit losses. Further, deterioration in asset quality was an undermining factor. However, the top line recorded impressive growth driven by improved interest income.
Results excluded certain discrete items. After considering these, net income came in at $693.1 million or $3.61 per share, up from $514.9 million or $2.76 per share in the prior-year quarter.
Performance in Detail
Net revenue was $735.9 million, up 24.2% year over year. Further, the figure surpassed the Zacks Consensus Estimate of $462.0 million. On a non-GAAP basis, total net revenue of $520.9 million grew 33.8% year over year, owing to a rise in net finance revenue as well as other income.
Net interest revenue was $157.4 million, up significantly year over year, mainly on account of higher interest income.
Total non-interest income was $578.5 million, an increase of 3.5% year over year. The growth mainly reflected higher other income and rental income on operating leases.
Net finance margin increased 10 basis points to 3.67%.
Operating expenses (excluding restructuring costs) of $323.8 million surged 44% year over year. The increase reflected a rise in all components except advertising and marketing cost.
Credit Quality
CIT Group's credit quality deteriorated during the reported quarter. Non-accrual loans increased 7% year over year to $215 million.
Further, net charge-offs were $61 million, up substantially from $19 million recorded in the prior-year quarter. Also, provision for credit losses was $49.9 million, jumping 30.6% year over year.
Balance Sheet and Capital Ratios
As of Sep 30, 2015, cash and short-term investment securities amounted to $12 billion, comprising $8.3 billion of cash, $0.1 billion of reverse repo securities, and $3.6 billion of debt and equity securities.
As of Sep 30, 2015, Common Equity Tier 1 and Total Capital ratios were 12.4% and 13.0%, as calculated under the fully phased-in Regulatory Capital Rules. Book value per share was $53.74 as of Sep 30, 2015, up from $49.10 as of Sep 30, 2014.
Share Repurchase
During the reported quarter, CIT Group bought back 3 million shares for $140 million. In total, the company returned nearly $170 million in capital to its shareholders.
Major Developments
In Oct 2015, CIT Group announced a series of initiatives that are aimed to aid its transition into a U.S. commercial bank. The company will be exploring strategic alternatives for its $10-billion Commercial Air business, and divest its CIT Canada and CIT China operations.
CIT Group maintains one of the leading commercial air franchises in the world. It owns, finances and manages a fleet of more than 350 commercial aircraft, serving nearly 100 customers in 50 countries. The company offers leasing and financing packages services for commercial airlines worldwide.
Our Viewpoint
We expect CIT Group’s liability-restructuring initiatives and access to low-cost debts to aid growth, going forward. Additionally, the company’s efforts to exit from its international operations, along with plans to simplify and realign its business model, will boost likely profitability.
However, sluggish growth in the industries where CIT Group provides finance, coupled with stringent regulations, might dent the company’s prospects.
Currently, CIT Group carries a Zacks Rank #3 (Hold).
Among other miscellaneous services companies, Ladder Capital Corp LADR is scheduled to report on Nov 4; while Financial Engines, Inc. FNGN will report on Nov 5 and StoneCastle Financial Corp., BANX on Nov 12.
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