CIT Group Inc.'s (CIT - Analyst Report) 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.
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.
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.
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 - Snapshot Report) and The Western Union Co. (WU - Analyst Report) are expected to announce results on May 1 while Apollo Residential Mortgage, Inc. (AMTG - Snapshot Report) will report on May 6.