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CIT Group Inc.'s (CIT - Analyst Report) second-quarter 2014 earnings from continuing operations of $1.02 per share outpaced the Zacks Consensus Estimate of 86 cents on the back of higher fee income. The reported figure was also above 87 cents earned in the year-ago quarter.
 
Our quantitative model had also projected that CIT Group would beat the Zacks Consensus Estimate, as it had the right combination of two key components: a positive Earnings ESP and a Zacks Rank #3 (Hold).
 
Shares of CIT Group surged nearly 10% in the pre-trading session, indicating positive investors’ response following the earnings release and announcement of the merger deal. The movement of the stock price when the trading session opens will give a better idea about whether CIT Group has been able to meet expectations.
 

 

Better-than-expected results were attributable to a rise in non-interest income, partially offset by lower net interest income and a rise in operating expenses. Further, credit quality showed improvement and liquidity position remained impressive.
 
CIT Group’s net income came in at $247 million, up 34.2% year over year.
 
Performance in Detail
 
On a non-GAAP basis, total net revenue was $454.6 million, up 1.9% from the prior-year quarter. The rise was largely driven by higher other income, partially offset by lower net finance revenue. Further, the figure was ahead of the Zacks Consensus Estimate of $420.0 million.
 
Net interest revenue was $47.6 million, down 15.8% from the year-ago quarter, mainly due to lower interest income.
 
Total non-interest income was $613.3 million, up 8.8% 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 71 basis points (bps) to 4.26%. The decline was primarily owing to sale of higher-yielding Dell Europe assets and portfolio re-pricing.
 
Operating expenses (excluding restructuring costs) were $219.4 million, up 1.3% from the prior-year quarter.
 
Credit Quality
 
CIT Group's credit quality improved during the reported quarter. Non-accrual loans fell 31.99% year over year to $190 million.
 
Also, net charge-offs were $21 million, down 41.7% from the prior-year quarter. Further, provision for credit losses was $10 million, down 33.3% from the year-ago quarter.
 
Balance Sheet and Capital Ratios
 
As of Jun 30, 2014, cash and short-term investment securities amounted to $6.8 billion, comprising $6.4 billion of cash and $0.4 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 Jun 30, 2014.
 
Capital ratios were strong as of Jun 30, 2014, with Tier 1 capital ratio of 16.0% and total capital ratio of 16.7%, both of which declined from the prior-quarter level. Book value per share was $46.42 as of Jun 30, 2014, up from $43.16 as of Jun 30, 2013.
 
Capital Deployment
 
During the quarter, CIT Group bought back more than 9.4 million shares for $416 million.  As of Jun 30, 2014, nearly $55 million of the $607 million authorized repurchase capacity remained.
 
Concurrently, CIT Group announced an additional repurchase of up to $500 million of common stock through Jun 30, 2015.
 
Additionally, last week, CIT Group announced a 50% hike in its quarterly dividend to 15 cents per share. The dividend will be paid on Aug 29 to shareholders of record as on Aug 15. 
 
Merger Deal with OneWest Bank
 
Along with the earnings release, CIT Group announced a definitive agreement to merge with IMB Holdco LLC, the parent company of OneWest Bank N.A. The cash cum stock deal is valued at $3.4 billion.  
 
Per the agreement, shareholders of IMB Holdco LLC will receive $2.0 billion in cash and 31.3 million shares of CIT Group presently valued at $1.4 billion (assuming a CIT stock price of $44.33). Notably, the deal requires regulatory approvals and is subject to customary closing conditions.
 
OneWest Bank is a privately owned regional bank operating 73 retail branches in Southern California. Following the completion of the deal, CIT Group will assume approximately $23 billion in assets and $15 billion in deposits. 
 
Further, CIT Bank, the company’s banking subsidiary, will merge with OneWest Bank under the name of ‘CIT Bank’. Moreover, the company expects the transaction to be 20% accretive to earnings per share in 2016.
 
Our Take
 
We expect CIT Group’s liability-restructuring initiatives and access to low-cost debts to aid its growth. Moreover, the company’s enhanced capital deployment activities will boost shareholders’ value. Further, the merger deal with OneWest Bank will strengthen bottom-line growth going forward.
 
However, sluggish development 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), Euronet Worldwide Inc. (EEFT - Snapshot Report) and Ladder Capital Corp (LADR - Snapshot Report) are expected to announce results on Jul 30, Jul 31 and Aug 4, respectively.

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