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CIT's Earnings In Line, Revenues Lag

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CIT Group Inc.'s (CIT - Free Report) second-quarter 2013 earnings of 91 cents per share came in line with the Zacks Consensus Estimate. Moreover, this is significantly better than the year-ago loss of 36 cents, which included debt refinancing charges related to the redemption of high-cost debt.

Results on a year-over-year basis benefited from increased net interest revenue, partly offset by lower non-interest income and a rise in operating expenses. Credit quality was a mixed bag, while capital ratios remained strong during the quarter.

CIT’s net income came in at $184 million in the said quarter, compared with a net loss of $73 million in the year-ago quarter.

Performance in Detail

On a non-GAAP basis, total net revenue was $460.6 million, almost twice the prior-year quarter figure of $230.9 million. Increases in net finance revenue and other income were the primary reasons for the rise. However, net revenue missed the Zacks Consensus Estimate of $689.0 million.

Net interest revenues were $70.2 million, compared with a negative $223.9 million in the year-ago quarter. The improvement came primarily on the back of a fall in interest expense.

Total non-interest income was $531.7 million, down 9.2% year over year. The fall was mainly due to lower other income.

Net finance revenue as a percentage of average earning assets (excluding the impact of debt prepayment) improved 21 basis points (bps) to 4.62%. The rise was driven mainly by lower funding costs.

Operating expenses (excluding restructuring costs) were $229.7 million, up 1.3% from $226.8 million in the prior-year quarter. The expense in the reported quarter included $9.5 million of restructuring costs.

Credit Quality

CIT's credit quality was a mixed bag in the reported quarter. Non-accrual loans fell 38.7% year over year to $279 million. Non-accruing loans as a percentage of finance receivables declined 98 bps year over year to 1.28%.

However, net charge-offs were $29 million, up from $17 million in the prior-year quarter. Further, provision for credit losses was $15 million in the second quarter, compared with $9 million in the year-ago quarter.

Balance Sheet and Capital Ratios

As of Jun 30, 2013, cash and short-term investment securities were $6.9 billion, comprising $5.7 billion of cash and $1.2 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 Jun 30, 2013.

Capital ratios were stable as of Jun 30, 2013, with Tier 1 capital ratio of 16.3% and a total capital ratio of 17.0%, both almost unchanged from the end of the prior quarter. Book value per share was $43.16 as of Jun 30, 2013 compared with $41.79 as of Jun 30, 2012.

Share Repurchases

In Jun 2013, CIT repurchased approximately 280,000 shares at an average price of $44.36 per share. In May, the company had announced a repurchase authorization of shares worth up to $200 million. The buyback program is expected to be completed by the end of 2013.

Our Take

We expect CIT’s liability restructuring initiatives and access to low-cost debts to support its growth. Moreover, the company is meaningfully deploying capital. However, sluggish growth in the industries where CIT provides finance, stringent regulations and a weak economic recovery could dent the company’s growth prospects.

CIT currently carries a Zacks Rank #2 (Buy).

Among other miscellaneous services finance stocks, Euronet Worldwide, Inc. (EEFT - Free Report) is scheduled to announce results on Jul 24, CapitalSource Inc. on Jul 30 and Financial Engines, Inc. on Aug 1.

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