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CIT (CIT) Up 74% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for CIT Group (CIT - Free Report) . Shares have added about 74% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is CIT due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

CIT Group Beats on Q3 Earnings, Provisions & Costs Rise

CIT Group’s third-quarter 2020 adjusted earnings per share of 84 cents hugely surpassed the Zacks Consensus Estimate of 14 cents. The reported figure excluded noteworthy items such as merger and integration-related costs in connection with the acquisition of Mutual of Omaha Bank, and performance stock unit expense reversal. In the prior-year quarter, the company recorded adjusted earnings of $1.29 per share.

Results benefited from an improvement in revenues, partly offset by higher expenses. Moreover, the balance sheet position remained strong in the quarter. However, an increase in provisions was a headwind.

Net income available to common shareholders (GAAP basis) was $82.9 million compared with $142.8 million recorded in the year-ago quarter.

Revenues Improve, Expenses Rise

Total net revenues (non-GAAP) were $474 million, up 4.3% year over year. Moreover, the top line surpassed the Zacks Consensus Estimate of $425 million.

Net interest revenues were $257.8 million, down marginally year over year.

Total non-interest income was $347.3 million, up 11.1% from the year-ago quarter. The rise was due to an improvement in other non-interest income.

NFM contracted 79 basis points year over year to 2.27%.

Operating expenses (excluding noteworthy items and intangible asset amortization) were $287 million, up 10% from the prior-year quarter.

Credit Quality Deteriorates

Provision for credit losses increased significantly year over year from $26.6 million to $63.3 million.

Non-accrual loans increased significantly year over year to $647 million. Net charge-offs (NCOs) were $66 million, up significantly from $26 million recorded in the prior-year quarter.

Balance Sheet Strong, Capital Ratios Worsen

As of Sep 30, 2020, average interest bearing cash and investment securities amounted to $13.6 billion, comprising $7.6 billion in interest bearing cash, and $6 billion in investment securities and securities purchased under the agreement to resell.

As of Sep 30, 2020, Common Equity Tier 1 and Total Capital ratios (as calculated under the fully phased-in Regulatory Capital Rules) were 9.9% and 13.1%, respectively, compared with 11.6% and 14.3% at the end of the prior-year quarter.

Outlook

As the company reduces deposit costs and deploys excess liquidity, NFM is expected to improve 5-10 bps in the fourth quarter on a sequential basis.

In the fourth quarter of 2020, other non-interest income is expected to decline 20-25%.

In the fourth quarter of 2020, average loans and leases are expected to remain flat on a sequential basis, while the same is expected to grow modestly in the first quarter of 2021.

Given the reduction in excess liquidity, average cash & investment securities are anticipated to decline 10-15% in the fourth quarter.

Operating expenses, excluding noteworthy items and intangible asset amortization, are anticipated to be $1.2 billion in 2020. This is because, the $25 million of cost synergies target related to the acquisition of Mutual of Omaha Bank, which was previously expected to be realized in 2021, will now be realized ahead of schedule in 2020.

Provisions are expected to continue to decline, assuming no significant change in the macro environment. However, NCOs are anticipated to remain elevated.

CET1 ratio is expected to be 9.8-10%.

Effective tax rate (excluding discrete items) is anticipated to be 27-28%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 94.23% due to these changes.

VGM Scores

At this time, CIT has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, CIT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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