CIT Group Inc.’s (CIT) third quarter earnings came in at 66 cents per share, substantially ahead of the Zacks Consensus Estimate of 50 cents. However, this compares unfavorably with the prior quarter’s revised earnings of 85 cents.
Results for the quarter benefited primarily from lower interest and non-interest expenses and a decreased provision for credit losses. However, a decline in interest income and fewer recoveries on assets charged-off were the downside.
Strong liquidity and capital position and improved credit quality were impressive during the quarter. Additionally, the quarter witnessed continued progress in optimizing the portfolio and reducing funding costs.
On a non-GAAP basis, total revenues for the reported quarter came in at $589.6 million, down 22% from $751.2 million in the prior quarter. Lower finance revenues were primarily responsible for the decrease in total revenues. However, revenues surpassed the Zacks Consensus Estimate of $135 million.
Quarter in Detail
Net income for the reported quarter came in at $131.5 million, down 23% from $171.4 million in the prior quarter. Net income for the reported quarter included $266 million pre-tax benefits related to the fresh start accounting (FSA). This was down by approximately $150 million from the prior quarter, primarily as a result of lower asset levels, slower customer prepayments and the repayment of high cost debt.
Net interest revenue decreased 56% sequentially to $83.5 million. A lower total interest income more than offset the decrease in total interest expense.
Net finance revenue as a percentage of average earning assets came in at 3.28%, down from 4.12% in the prior quarter. This includes a benefit of 2.62% from FSA. Excluding FSA and the effect of prepayment penalties on high-cost debt, margin increased 23 basis points (bps) sequentially to 0.92%.
Operating expenses decreased 17% from the prior quarter to $228.8 million. The decline reflects lower employee retention plan and benefit costs. Total headcount was lower by 5% from the prior quarter to approximately 3,800.
CIT’s provision for credit losses decreased 32% from the prior quarter to $165.2 million. The provision decreased as the build-up in non-specific reserves was partially offset by the reversal of reserves related to the liquidating Vendor Finance consumer portfolio.
Credit Quality
After the application of fresh start accounting (post-FSA), credit metrics improved during the quarter. Net charge-offs for the reported quarter decreased 5% from the prior quarter to $101 million. Non-accrual loans decreased $447 million from the prior quarter to $2.6 billion.
Net charge-offs increased 4 bps sequentially to 1.41% of average finance receivables. Also, non-accruing loans increased 48 bps sequentially to 7.57% of finance receivables.
Capital Ratios
Capital ratios were strong as of September 30, 2010 with a Tier 1 capital ratio of 18.7% and a total capital ratio of 19.6%, up from 17.5% and 18.9%, respectively, at the end of the prior quarter. The improvement in capital ratios was a result of a decline in risk-weighted assets and an increase in common equity. Book value per share was $44.09 at September 30, 2010 compared with $43.34 as of June 30, 2010.
We expect CIT to continue to benefit from its strong capital and liquidity position. However, the company will have to focus on expense management. Failure to do so will continue to put pressure on the bottom line.
CIT currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
