CIT Loss Widens on Interest-Income Drop, Charges

Date : 07/30/2012 @ 8:40AM
Source : Dow Jones News
Stock : American Express Company (AXP)
Quote : 76.97  -0.23 (-0.30%) @ 11:14AM

CIT Loss Widens on Interest-Income Drop, Charges

Cit Group (NYSE:CIT)
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--CIT redeemed $4.1 billion of 7% Series C notes in second quarter

--Company saw improvements in lending profitability

--Loan activity in its bank unit increased

CIT Group Inc. (CIT), the business lender led by Wall Street veteran John Thain, reported a wider loss in the second quarter as expenses tied to debt refinancing continued to weigh on results and interest income declined.

The company's loss of $70.7 million, or 35 cents a share, beat the estimates of analysts, who were expecting on average a loss of 41 cents a share on a fully-reported basis, according to Thomson Reuters.

"Our results this quarter, while impacted by the repayment of high cost debt, reflect our efforts to grow our businesses as we meet the financing needs of our small business and middle-market clients," Thain, chairman and chief executive officer, said in a statement.

The second-quarter loss compared with a year-earlier loss of $49.7 million, or 25 cents a share. The latest period included $286 million in debt-refinancing charges, compared with $163 million a year earlier.

CIT, which emerged from bankruptcy in late 2009, has been working to get on a more stable footing by paying off debt and raising deposits, a lower-cost source of funding for its business loans.

The company traditionally relied on issuing debt to fund its loans, which are used by mostly small and midsized businesses for acquisitions, office-equipment purchases, transportation and other activities.

Since then, Thain, the former Merrill Lynch chairman, and his management team have moved several of its lending platforms from its holding company to its bank subsidiary, allowing it to tap deposits as a funding source. Last year it launched an online consumer bank that offers certificates of deposit and savings accounts, taking on other speciality lenders that have embarked on similar strategies, including American Express Co. (AXP) and Discover Financial Services (DFS).

The bank, which may also add checking accounts and business accounts, has raised more than $2 billion in online-consumer deposits since its launch last year, CIT said Monday.

Over time, the company's goal is to rely on deposits for 35% to 45% of its funding, unsecured debt for 25% to 35% of its funding and secured funding for 25% to 35%. At the end of the second quarter, deposits comprised 23% of its funding, the company said.

CIT has been working to pay down its debt to improve its lending profitability. It redeemed about $4.1 billion of its 7% Series C notes in the quarter, and recently announced plans to redeem another $600 million of those notes in the coming months. Including the latest announcement, CIT will have paid down more than $26.5 billion of its debt since exiting bankruptcy.

"While work still remains...we see more investors starting to take notice of CIT as the turnaround takes shape and we get better visibility on normalized earnings," Don Fandetti, an analyst with Citigroup Inc., wrote in a research note last week.

Total interest income fell 32% to $409.3 million, while total noninterest income fell 9.8% from the previous year to $589.5 million.

But the company had improvement in its credit quality during the quarter.

Net charge-offs were $17 million, down from $55 million the year before and $22 million in the first quarter. Credit-loss provisions totaled $8.9 million, down from $84.1 million a year before and $42.6 million in the first quarter.

Its net financing margin, a measure of lending profitability, was 3.02% in the quarter when excluding the effects of fresh start accounting, a measure it adopted upon exiting bankruptcy, and debt-repayment costs. That compares with 1.4% a year earlier and 1.97% in the previous quarter. The company attributed the improvement to lower funding costs, among other things.

CIT's goal over time has been to get this number in the 3% to 4% range, a level it enjoyed before its bankruptcy.

It funded $2.4 billion of new loan volume in the quarter, up 38% from a year earlier. It ended the quarter with $2.7 billion in loan commitments, up 31% from a year earlier.

Within CIT Bank, committed loan volume increased 63% to $1.8 billion from a year earlier.

Total assets as of June 30 were $42.8 billion, down $1.4 billion from the first quarter and $5.4 billion from the year earlier, reflecting fewer consumer assets as the company sold $1.1 billion in student loans from its legacy portfolio.

Shares closed Friday at $34.79 and were inactive in premarket trade. The stock is off 12% in the last 12 months.

-Victoria Stilwell contributed to this story.

Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com

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