CIT Group (CIT) Q1 Earnings Lag on High Costs & Provisions

CIT Group Inc. CIT reported first-quarter 2016 earnings from continuing operations of 75 cents per share, which fell short of the Zacks Consensus Estimate of 77 cents. However, the figure came 27.1% above the year-ago figure.

 

Lower-than-expected results reflected higher operating expenses and a substantial 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 $146.9 million or 73 cents per share, up from $103.7 million or 59 cents per share in the prior-year quarter.

Performance in Detail

Net revenue was $885.3 million, up 41.3% year over year. On a non-GAAP basis, total net revenue of $653.8 million grew 54.3% year over year, driven by a rise in net finance revenue. Further, the figure outpaced the Zacks Consensus Estimate of $630 million.

Net interest revenue was $209 million, up significantly from $9.7 million in the prior-year quarter, mainly on account of higher interest income.

Total non-interest income was $676.3 million, an increase of 9.6% year over year. The rise reflected an increase in all income components.

Net finance margin increased 51 basis points to 3.74%.

Operating expenses (excluding restructuring costs and intangible assets amortization) of $321.8 million surged 33% year over year. The increase was due to a 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 60.3% year over year to $295 million.

Further, net charge-offs were $51 million, significantly up from $21 million recorded in the prior-year quarter. Also, provision for credit losses was $99 million, considerably up year over year.

Balance Sheet and Capital Ratios

As of Mar 31, 2016, cash and short-term investment securities amounted to $11.0 billion, comprising $8.1 billion of cash and $2.9 billion of debt and equity securities.

As of Mar 31, 2016, Common Equity Tier 1 and Total Capital ratios were 13.1% and 13.7%, respectively, as calculated under the fully phased-in Regulatory Capital Rules. Book value per share was $55.16 as of Mar 31, 2016, up from $50.26 as of Mar 31, 2015.

Our Viewpoint

CIT Group's liability-restructuring initiatives and access to low-cost debts are expected 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, On Deck Capital, Inc. ONDK, StoneCastle Financial Corp. BANX and General Finance Corporation GFN are scheduled to report results on May 2, May 5 and May 9, respectively.

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