CIT Reports In Red

CIT Group Inc.’s ( CIT - Analyst Report ) third quarter 2011 loss came in at 8 cents per share, significantly lower than the Zacks Consensus Estimate of a loss of 18 cents and the prior quarter’s loss 24 cents. However, it was unfavorable compared with the prior-year quarter’s earnings of 58 cents.

Though the quarter’s results benefited from an improvement in credit quality, a considerable deterioration of net interest revenue and higher interest and non-interest expenses formed the downside.

Net loss for the reported quarter came in at $16.3 million compared with a net loss of $48.0 million in the preceding quarter and net income of $115.8 million in the year-ago quarter.

Quarter in Detail

On a non-GAAP basis, CIT’s total net revenue came in at $428.5 million, up 38.8% sequentially from $308.7 million but down from 31.9% year over year from $629.5 million. Higher net finance revenues primarily accounted for the sequential growth in total net revenue. However, revenues were nowhere near the Zacks Consensus Estimate of $887.0 million.

CIT’s net interest revenue in the third quarter stood at negative $91.0 million compared with negative $203.6 million in the prior quarter and positive $104.0 million in the year-ago quarter. A much lower total interest income more than offset the increase in total interest expenses.

Net finance revenue as a percentage of average earning assets stood at 2.30%, up from 0.08% in the prior quarter but down from 3.44% in the prior-year quarter. Excluding fresh start accounting (FSA) and debt prepayment penalties, the margin improved 15 basis point (bps) sequentially and 65 bps year over year to 1.60%.

Operating expenses declined 11% sequentially and 4% year over year to $219.9 million.

Credit Quality

CIT’s credit quality continued to improve during the third quarter. Net charge-offs (NCOs) were $47 million, down from $56 million in the prior quarter and $101 million in the prior-year quarter. The reduction was driven mainly by a decline in NCOs across all segments, reflecting credit quality improvements. NCOs as a percentage of average finance receivables decreased 12 bps sequentially and 56 bps year over year to 0.84%.

CIT’s non-accrual loans dropped 14% sequentially and 55% year over year to $914 million. All segments reported declines from the prior periods, with the exception of Trade Finance, which reported a sequential quarter increase. Non-accruing loans as a percentage of finance receivables slipped 57 bps sequentially and 241 bps year over year to 4.19%.

With continued reduction in specific reserves and improved portfolio credit quality, provision for credit losses declined to $48 million from $85 million last quarter and $165 million in the prior year quarter.

Capital Ratios

Capital ratios were strong as of September 30, 2011, with a Tier 1 capital ratio of 19.0% and a total capital ratio of 19.9%, down from 19.3% and 20.2%, respectively, at prior quarter end.

Book value per share was $44.38 as of September 30, 2011 compared with $44.58 as of June 30, 2011.

Our Viewpoint

We expect CIT to continue benefiting from its strong capital and liquidity position. However, the company will have to focus on top-line improvement; otherwise, its bottom-line will remain under pressure.

CIT currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, one of its competitors, Dollar Financial Corp. ( DLLR - Analyst Report ) retains a Zacks #1 Rank (a short-term Strong Buy rating).