Lower Interest Income Drags CIT Group Earnings - Analyst Blog

CIT Group Inc.'s CIT first-quarter 2014 earnings of 55 cents per share lagged the Zacks Consensus Estimate of 87 cents owing to lower interest income and a rise in provision for credit losses. The reported figure was also below 81 cents earned in the year-ago quarter.

Our quantitative model had also projected that CIT Group would miss the Zacks Consensus Estimate, as it did not have the right combination of two key components: a positive Earnings ESP and a Zacks Rank #3 (Hold) or better rank. The company has a Zacks Rank #3 but its ESP was negative.

Lower-than-expected results were due to a significant decline in net interest income and higher-than-expected provision for credit losses, partially offset by a rise in non-interest income and drop in operating expenses. Further, while credit quality was a mixed bag, capital ratios remained strong.

CIT Group's net income came in at $109 million in the said quarter, down 33.1% year over year.

Performance in Detail

On a non-GAAP basis, total net revenue was $398.1 million, down 8.6% from the prior-year quarter. The decline was largely due to lower net finance revenue, partially offset by a rise in other income. Further, the figure lagged the Zacks Consensus Estimate of $441.0 million.

Net interest revenue was $32.4 million, down 50.0% from the year-ago quarter. The decrease was mainly due to lower interest income.

Total non-interest income was $566.1 million, up 3.6% year over year. The rise was attributable to increase in rental income on operating leases and other income.

Net finance revenue as a percentage of average earning assets (excluding the impact of debt prepayment) decreased 98 basis points (bps) to 3.66%. The decline was primarily due to sale of higher-yielding Dell Europe assets and a fall in operating lease margin.

Operating expenses (excluding restructuring costs) were $225.8 million, down 1.7% from the prior-year quarter.

Credit Quality

CIT Group's credit quality was a mixed bag in the reported quarter. Non-accrual loans fell 25.9% year over year to $218 million.

However, net charge-offs were $36 million, up from $10 million in the prior-year quarter. Further, provision for credit losses was $37 million in the quarter, up 85% from the year-ago quarter.

Balance Sheet and Capital Ratios

As of Mar 31, 2014, cash and short-term investment securities were $8.6 billion, comprising $6.8 billion of cash and $1.8 billion of short-term investments. Moreover, CIT Group had approximately $1.4 billion of unused and committed liquidity under a $1.5 billion revolving credit facility as of Mar 31, 2014.

Capital ratios were strong as of Mar 31, 2014, with Tier 1 capital ratio of 16.1% and total capital ratio of 16.8%, both of which decreased from the prior-quarter level. Book value per share was $45.06 as of Mar 31, 2014, up from $42.21 as of Mar 31, 2013.

Share Repurchases

During the said quarter, CIT Group bought back more than 2.9 million shares and in April, the company repurchased 1.6 billion shares at an aggregate cost of $210.8 million.

In Jan 2014, CIT Group had an authorization to repurchase $307 million worth of shares through the end of this year. Further, earlier this month, the company authorized an additional share repurchase of up to $300 million of common stock, bringing the total authorization to $607 million in 2014.

Our Take

We expect CIT Group's liability restructuring initiatives and access to low-cost debts to aid growth. Moreover, the company's steady capital deployment activities will boost shareholders' value. However, sluggish growth in the industries where CIT Group provides finance, stringent regulations and a weak economic recovery could dent the company's growth prospects.

Among other miscellaneous services companies, FleetCor Technologies, Inc. FLT and The Western Union Co. WU are expected to announce results on May 1 while Apollo Residential Mortgage, Inc. AMTG will report on May 6.