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CIT Group Inc.'s (CIT - Analyst Report) fourth-quarter earnings of $1.03 per share significantly exceeded the Zacks Consensus Estimate of 65 cents. This is also substantially ahead of the prior-year quarter’s earnings of 18 cents.

The results include charges related to the redemption of student loan asset-backed securities, certain senior unsecured notes and debt refinancing charges related to the redemption of high-cost debt.

Better-than-expected quarterly results were driven by augmented revenues, partially offset by higher operating expenses. Moreover, continuously improving credit quality and stable capital ratios were the highlights of the quarter.

CIT’s net income came in at $207 million in the quarter under review, compared with $36 million in the year-ago quarter.

For 2012, net loss reached $592 million or $2.95 per share compared to net income of $15 million or 7 cents per share in 2011. Loss per share in 2012 was narrower than the Zacks Consensus Estimate loss of $3.27.

Performance in Detail

On a non-GAAP basis, total net revenues stood at $483.8 million in the fourth quarter, surging 62.5% from $297.8 million in the previous-year quarter. Higher net finance revenue was the primary reason for the rise. Yet, net revenues were nowhere near the Zacks Consensus Estimate of $759.0 million.

For 2012, total net revenues were $576.2 million, plunging 61.1% year over year. Moreover, net revenues were much lower than the Zacks Consensus Estimate of $3,381 million.

Net interest revenues reached a negative $9.6 million in the reported quarter compared with a negative $199.1 million in the year-ago quarter. The main reason for the negative net interest revenue was higher interest expense.

Total non-interest income stood at $623.7 million, down 1.6% year over year. The fall was mainly due to lower other income.

Net finance revenue as a percentage of average earning assets (excluding fresh start accounting and debt prepayment penalties) improved 161 basis points (bps) year over year to 3.63%. The rise was driven mainly by lower funding costs as well as reduction of low-yielding assets.

Operating expenses were $231.9 million, rising 4.2% from $222.5 million in the prior-year quarter. The expense in the reported quarter included $10 million of legal charges.

Credit Quality

CIT's credit quality continued to improve during the reported quarter with almost all the major metrics declining. Net charge-offs (NCOs) were $17 million, down from $24 million in the prior-year quarter. NCOs as a percentage of average finance receivables declined 21 bps year over year to 0.41%.

Moreover, non-accrual loans dropped 52.7% year over year to $332 million. Non-accruing loans as a percentage of finance receivables declined 194 bps year over year to 1.59%.

Further, there was no provision for credit losses in the fourth quarter compared with a provision of $16 million in the year-ago quarter. This favorable trend reflects the overall improvement in asset quality.

Balance Sheet and Capital Ratios

As of Dec 31, 2012, cash and short-term investment securities were $7.6 billion, consisting of $6.8 billion of cash and $0.8 billion of short-term investments. Additionally, CIT had approximately $1.9 billion of unused and committed liquidity under a $2 billion revolving credit facility as of Dec 31, 2012.

Capital ratios were stable as of Dec 31, 2012, with a Tier 1 capital ratio of 16.2% and a total capital ratio of 17.0%, both showing marginal deterioration from the end of the prior quarter. Book value per share was $41.49 as of Dec 31, 2012 compared with $44.27 as of Dec 31, 2011.

Our Take

CIT's initiatives to restructure the balance sheet as well as its access to low-cost debts will not only support its future growth plans, but also lead to an improvement in net interest margin and profitability. Moreover, the company is poised to benefit from its strong capital and liquidity position.

However, CIT's growth prospects will likely be adversely impacted by sluggish growth in the industries where the company provides finance, stringent regulations as well as the weak economic recovery. Further, the company will have to focus on improving its top line; otherwise, its bottom line will continue to remain pressurized.

Another miscellaneous services finance company, Asset Acceptance Capital Corp. , is expected to release its fourth-quarter earnings on Mar 4, 2013.

CIT currently retains a Zacks Rank #3 (Hold). Other miscellaneous services finance company that are worth considering include Euronet Worldwide Inc. (EEFT - Snapshot Report) and FleetCor Technologies Inc. (FLT - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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