CIT Group Fell 7% on Dismal Q4 Earnings; Revenues Up Y/Y

Shares of CIT Group Inc. CIT slumped more than 7% following the release of its fourth-quarter 2015 results before the market opened. Earnings from continuing operations of 75 cents per share significantly lagged the Zacks Consensus Estimate of 82 cents. Also, the figure came 33.6% below the year-ago adjusted figure of $1.13.
 

 

For 2015, adjusted earnings from continuing operations were $2.25 per share, which missed the Zacks Consensus Estimate of $2.96. Also, the figure declined 35.3% year over year.

Lower-than-expected results reflected 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 $144 million or 72 cents per share, down from $251 million or $1.37 per share in the prior-year quarter. For 2015, net income was $1,056.6 million or $5.67 per share, a decline from $1,130 million or $5.96 per share in 2014.

Performance in Detail

Net revenue was $805 million, up 16.3% year over year. Further, the figure easily outpaced the Zacks Consensus Estimate of $598 million. On a non-GAAP basis, total net revenue of $558.6 million grew 14.2% year over year, driven by a rise in net finance revenue.

Net interest revenue was $223.7 million, up significantly from $29.3 million in the prior-year quarter, mainly on account of higher interest income.

Total non-interest income was $581.3 million, a decrease of 12.3% year over year. The fall reflected substantial decline in other income.

Net finance margin increased 2 basis points to 3.57%.

Operating expenses (excluding restructuring costs) of $297.6 million surged 23.4% year over year. The increase was due to rise in all components except advertising and marketing costs.

Credit Quality

CIT Group's credit quality deteriorated during the reported quarter. Non-accrual loans increased 66.5% year over year to $268 million.

Further, net charge-offs were $32 million, up 39.1% from $23 million recorded in the prior-year quarter. Also, provision for credit losses was $58 million, significantly up year over year.

Balance Sheet and Capital Ratios

As of Dec 31, 2015, cash and short-term investment securities amounted to $11.3 billion, comprising $8.3 billion of cash and $3.0 billion of debt and equity securities.

As of Dec 31, 2015, Common Equity Tier 1 and Total Capital ratios were 12.7% and 13.3%, as calculated under the fully phased-in Regulatory Capital Rules. Book value per share was $54.61 as of Dec 31, 2015, up from $50.13 as of Dec 31, 2014.

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 likely boost profitability.

However, sluggish growth in the industries where CIT Group provides finance, coupled with stringent regulations, might hurt its prospects.

Currently, CIT Group carries a Zacks Rank #4 (Sell).

Among other miscellaneous services companies, General Finance Corporation GFN is scheduled to report on Feb 8; while On Deck Capital, Inc. ONDK will report on Feb 22 and StoneCastle Financial Corp., BANX on Feb 25.

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