CIT Lags Estimates, Profit Falls

CIT Group Inc.’s (CIT - Analyst Report) fourth quarter 2010 earnings came in at 37 cents per share, lagging the Zacks Consensus Estimate of 42 cents. This also compares unfavorably with the prior quarter’s revised earnings of 58 cents.

For full-year 2010, CIT reported earnings per share of $2.58, which was ahead of the Zacks Consensus Estimate of $2.51.

Though the quarter's results benefited primarily from lower interest and non-interest expenses, decline in net interest revenue and increase in provision for credit losses were the downside. Strong liquidity and capital position were impressive during the quarter.

Net income for the reported quarter came in at $74.8 million, down 35.4% from $115.8 million in the prior quarter. Net income for the reported quarter included $32 million pre-tax restructuring charge. Full-year net income totaled $516.8 million.

Quarter in Detail

On a non-GAAP basis, total net revenues for the reported quarter came in at $505.8 million, down 19.6% from $629.5 million in the prior quarter. Lower net finance revenues and drop in other income were primarily responsible for the decrease in total net revenues. For full year, total net revenue stood at $2.61 billion.

Net interest revenue in the quarter plunged 51.6% sequentially to $50.3 million. A lower total interest income more than offset the decrease in total interest expense.

Net finance revenue as a percentage of average earning assets came in at 3.04%, down from 3.44% in the prior quarter. This includes a benefit of 2.94% from fresh start accounting (FSA). Excluding FSA and the effect of prepayment penalties on high-cost debt, margin fell 39 basis points (bps) sequentially to 0.56%.

Operating expenses decreased 4.7% from the prior quarter to $218.0 million. The decline reflects lower compensation costs.

Credit Quality

Post FSA accounting, credit metrics improved during the quarter. Net charge-offs (NCOs) for the reported quarter increased 78.2% from the earlier quarter to $179.6 million. The increase in NCOs includes the acceleration of charge-offs based on delinquency status in selected portfolios in Vendor Finance and Corporate Finance, as well as charge-offs on loans moved to held for sale.

CIT’s non-accrual loans decreased $400 million from the prior quarter to $1.6 billion. Provision for credit losses grew 10.5% from the prior quarter to $182.4 million.

Net charge-offs increased 133 bps sequentially to 2.73% of average finance receivables. However, non-accruing loans declined 84 bps sequentially to 6.60% of finance receivables.

Capital Ratios

Capital ratios were strong as of December 31, 2010 with a Tier 1 capital ratio of 19.1% and a total capital ratio of 20.0%, up from 18.4% and 19.3%, respectively, at the end of the prior quarter. The improvement in capital ratios resulted from a decline in risk-weighted assets and an increase in common equity.

Book value per share was $44.48 as of December 31, 2010 compared with $44.19 as of September 30, 2010.

Our Viewpoint

We expect CIT to continue to benefit from its strong capital and liquidity position. However, the company will have to focus on expense management. Failure to do so will continue to keep the bottom line under pressure.

One of the close competitor of CIT, Duff & Phelps Corporation (DUF - Snapshot Report) is schelued to release its fourth quarter 2010 results on February 23.

CIT currently retains its Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

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