CIT Group Inc. (CIT) reported fourth-quarter 2011 earnings per share of 17 cents, significantly ahead of the Zacks Consensus Estimate of 9 cents and the prior quarter’s loss 15 cents. However, this was unfavorable compared with the prior-year quarter’s earnings of 41 cents.

For fiscal 2011, CIT’s earnings stood at 14 cents per share significantly below the Zacks Consensus Estimate of 10 cents and the prior period’s earnings of $2.62.

CIT’s quarterly results benefited from improvement in credit quality and decline in operating expenses. The company’s capital ratios were also stable. However, a fall in the top line along with higher interest expenses were the primarily dampeners.

Quarter in Detail

Net income for the reported quarter came in at $33.9 million compared with a net loss of $29.2 million in the preceding quarter and net income of $83.2 million in the year-ago quarter. For the full year, CIT recorded a net income of $27.8 million versus $525.7 million in 2010.

On a non-GAAP basis, CIT’s total net revenue came in at $305.8 million, down 29% sequentially from $428.5 million and 40% year over year from $629.5 million. Decline in net finance revenues primarily accounted for the sequential fall in total net revenue. Net revenues were nowhere near the Zacks Consensus Estimate of $1,117.0 million.

For full year, total net revenue was $1,485.9 million compared with $2,606.7 million in 2010. The Zacks Consensus Estimate was $4,865 million was 2011.

CIT’s net interest revenue in the fourth quarter was negative $194.1 million compared with negative $100.3 million in the prior quarter and positive $48.8 million in the year-ago quarter. A much lower total interest income more than offset the increase in total interest expenses.

Net finance revenue as a percentage of average earning assets stood at 1.14%, down from 2.19% in the prior quarter and 3.08% in the prior-year quarter. Excluding fresh start accounting (FSA) and debt prepayment penalties, the margin improved 49 basis point (bps) sequentially and 149 bps year over year to 2.07%, driven by lower funding costs.

Considering facility and severance restructuring charges of $5 million, operating expenses stood at $221 million. Excluding these charges, operating expenses decreased 4% sequentially and 1% from the prior year quarter. The sequential dip reflects lower compensation and benefit costs.

Credit Quality

CIT’s credit quality continued to improve during the fourth quarter. Net charge-offs (NCOs) were $24 million, down from $46 million in the prior quarter and $180 million in the prior-year quarter.

The reduction was driven mainly by a decline in NCOs in Corporate Finance and Vendor Finance segments. NCOs as a percentage of average finance receivables decreased 38 bps sequentially and 228 bps year over year to 0.45%.

CIT’s non-accrual loans dropped 23% sequentially and 57% year over year to $702 million. All segments reported declines from the prior periods. Non-accruing loans as a percentage of finance receivables slipped 66 bps sequentially and 124 bps year over year to 3.53%.

With continued reduction in specific reserves and improved portfolio credit quality, provision for credit losses declined to $16 million from $47 million last quarter and $182 million in the prior-year quarter.

Balance Sheet and Capital Ratios

As of December 31, 2011, cash and short-term investment securities were $8.4 billion, consisting of $7.4 billion of cash and $0.9 billion of short-term investments.

CIT continues with its restructuring initiatives to lower its cost of capital and improve profitability. Since January 2010, the company has eliminated or refinanced over $17 billion of high cost first and second lien debt, including $9.5 billion during 2011 and $2 billion earlier this month.

Moreover, on January 19, CIT announced that it would redeem $500 million of Series A Notes maturing in 2016 on February 21. Following the completion of these redemptions, nearly $4 billion of Series A Notes due in 2016 and 2017 will remain outstanding.

Capital ratios were strong as of December 31, 2011, with a Tier 1 capital ratio of 18.8% and a total capital ratio of 19.7%, in line with prior quarter end. Book value per share was $44.31 as of December 31, 2011 compared with $44.38 as of September 30, 2011.

Our Take

We expect the company’s initiatives to restructure balance sheet and lower funding costs will support its future growth. Moreover, it is poised to benefit from its strong capital and liquidity position.

However, sluggish growth across the economy could mar the company’s growth prospects. Furthermore, the company will have to focus on top-line improvement; otherwise, its bottom-line will continue to remain under pressure.

One of CIT’s peers, Moneygram International Inc. (MGI) is scheduled to announce its fourth quarter results on February 3, 2012.

CIT currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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