CIT Group Inc. (CIT - Free Report) and its bank subsidiary CIT Bank, NA’s ratings have been affirmed by Moody’s Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) . The subsidiary is rated baa3 standalone baseline credit assessment (BCA) and Baa1/Prime-2 for deposits. Also, the holding company’s long-term senior unsecured debt rating of Ba1 has been affirmed.
However, the outlook for the company and its subsidiary has been downgraded to ‘stable’ from ‘positive’. This downward revision reflects Moody’s view of downturn in the U.S. economy in 2020 due to the coronavirus outbreak to negatively impact CIT Group's asset quality and profitability.
Notably, the company’s risk of asset quality deterioration in its oil and gas extraction/services portfolio equivalent to 31% of the company’s Moody’s-adjusted tangible common equity (TCE) as of Dec 31, 2019 also remains a reason for the downward revision.
Reasons for Ratings Affirmation
The rating affirmation follows Moody’s belief that CIT Group’s financial transformation target remains on track, which includes less reliance on market funds, improved operating earnings projection and increased use of less risky secured lending. Also, the recent deal to acquire Omaha, NE-headquartered Mutual of Omaha’s savings bank subsidiary, Mutual of Omaha Bank, complements the target.
Notably, following the completion of the Mutual of Omaha Bank deal, CIT Group’s common equity tier 1 (CET) ratio is expected to decline from 12% as of Dec 31, 2019, to 10%. Nevertheless, the company intends to rebuild its CET1 ratio toward 10.5%, which Moody’s feels is reasonable enough, given the current asset-risk profile. The company has suspended its share buyback until it meets the CET 1 target.
Moreover, CIT Group's ratings reflect its competitive position in commercial finance operations, revenue diversity, robust liquidity and rational “capital targets”, per Moody’s.
Apart from these, Moody’s noted the company’s continued efforts in improving its deposit quality, which has also been further strengthened due to the recent deal. However, though the quality of deposits has improved, CIT Group lags other competitive banks and the company’s funding costs also remain high. Additionally, some of the company’s earning assets remain at high risks, per Moody’s.
Credit effects of the coronavirus pandemic, weakening global economic outlook, fall in oil prices and asset-price declines is unprecedented, per Moody’s. Notably, CTI Group's some exposure to the oil and gas sector through its energy and utilities portfolio, sensitive to demand and oil prices, is expected to be stressed in the second or third quarters of 2020.
Furthermore, in absence of any clarity over conditions to improve, Moody's predicts low oil prices to prevail in 2020 and likely to recover in 2021, depending on the normalization of economic activity, international trade and supply-chain disruptions.
Shares of the company have depreciated 68.1% in the last six months compared with the 32.2% decline recorded by the industry. CIT Group currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other finance stocks which witnessed ratings affirmation by Moody’s recently, include Raymond James Financial (RJF - Free Report) and BOK Financial (BOKF - Free Report) . The ratings outlook of Raymond James was affirmed at stable, while BOK Financial’s outlook was downgraded to negative.
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