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CIT Lags on Earnings and Revenues

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CIT Group Inc.'s (CIT - Free Report) first-quarter 2013 earnings of 81 cents per share came in marginally below the Zacks Consensus Estimate of 89 cents. However, this is significantly better than the year-ago loss of $2.13. The results include debt refinancing charges related to the redemption of high-cost debt.

Lower-than-expected quarterly results were impacted by lower non-interest income and a rise in operating expenses, partially offset by improvement in net interest revenues. Nevertheless, continuously improving credit quality and stable capital ratios were the tailwinds.

CIT’s net income came in at $163 million in the quarter under review, compared with a net loss of $427 million in the year-ago quarter.

Performance in Detail

On a non-GAAP basis, total net revenue stood at $435.6 million compared with negative revenue of $96.0 million in the previous-year quarter. Significantly higher net finance revenue was the primary reason for the rise. Yet, net revenue substantially missed the Zacks Consensus Estimate of $735.0 million.

Net interest revenues stood at $63.9 million in the reported quarter compared with a negative $654.3 million in the year-ago quarter. The main reason for the improvement was lower interest expense.

Total non-interest income stood at $515.0 million, down 26.0% 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 167 basis points to 4.64%. The rise was driven mainly by lower funding costs.

Operating expenses were $235.3 million, rising 4.9% from $224.3 million in the prior-year quarter. The expense in the reported quarter included $6 million of restructuring costs.

Credit Quality

CIT's credit quality continued to improve during the reported quarter with almost all the major metrics declining. Net charge-offs were $10 million, plunging from $22 million in the prior-year quarter.

Moreover, non-accrual loans dropped 39.0% year over year to $294 million. Non-accruing loans as a percentage of finance receivables declined 103 bps year over year to 1.33%.

Further, provision for credit losses was $20 million in the first quarter compared with $43 million in the year-ago quarter. This favorable trend reflects the overall improvement in the asset quality.

Balance Sheet and Capital Ratios

As of Mar 31, 2013, cash and short-term investment securities were $6.9 billion, consisting of $5.5 billion of cash and $1.4 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 Mar 31, 2013.

Capital ratios were stable as of Mar 31, 2013, with a Tier 1 capital ratio of 16.3% and a total capital ratio of 17.1%, both unchanged from the end of the prior quarter. Book value per share was $42.21 as of Mar 31, 2013 compared with $42.17 as of Mar 31, 2012.

Our Take

CIT's initiatives to restructure the balance sheet and its access to low-cost debts will not only support its future growth plans, but 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 results on Apr 24.

CIT currently carries a Zacks Rank #2 (Buy). Other miscellaneous services finance stocks that are worth considering include Moneygram International Inc. (MGI - Free Report) and SS&C Technologies Holdings, Inc. (SSNC - Free Report) . Both these companies carry the same Zacks Rank as CIT.

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