CIT Reports Loss on Lower Revenue - Analyst Blog
July 27 2011 - 8:30AM
Zacks
CIT Group Inc.’s (CIT) second quarter 2011 loss
came in at 24 cents per share, beating the Zacks Consensus Estimate
of a loss of 26 cents. However, this compared unfavorably with the
prior quarter’s earnings of 33 cents and the prior-year quarter’s
earnings of 91 cents.
Though the quarter’s results benefited from an improvement in
credit quality, a considerable deterioration of net interest
revenue and higher interest and non-interest expenses formed the
downside.
Net loss for the reported quarter came in at $48.0 million
compared with a net income of $65.6 million in the preceding
quarter and $181.6 million in the year-ago quarter.
On a non-GAAP basis, CIT’s total net revenue came in at $308.7
million, down 35.1% sequentially from $475.3 million and 61.2% year
over year from $794.6 million. Lower net finance revenues primarily
accounted for the decrease in total net revenue. Revenues were also
nowhere near the Zacks Consensus Estimate of $855.0 million.
Quarter in Detail
Net interest revenue deteriorated to negative $203.6 million
from negative $55.7million in the prior quarter and positive $216.3
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 0.80%, down from 2.24% in the prior quarter and 4.32% in
the prior-year quarter. This includes a loss of 0.13% from fresh
start accounting (FSA) and 0.52% related to the effect of
prepayment penalties on high-cost debt. Excluding these losses, the
margin fell 1 basis point sequentially but improved 72 basis points
(bps) year over year to 1.45%.
Operating expenses increased 13.6% sequentially and 11.5% year
over year to $245.8 million. The hike primarily reflected a rise in
professional fees as well as compensation and benefits expenses,
which were partly mitigated by a lower provision for severance and
facilities exiting activities.
Credit Quality
Net charge-offs (NCOs) were $55.7 million, down 60.4% from
$140.65 million in the prior quarter and 47.6% from $106.3 million
in the prior-year quarter. The reduction was driven mainly by a
decline in NCOs across all segments, reflecting credit quality
improvements. Net charge-offs as a percentage of average finance
receivables decreased 138 bps sequentially and 40 bps year over
year to 0.96%.
CIT’s non-accrual loans dropped 18.7% sequentially and 48.3%
year over year to $1.1 billion. Non-accruing loans as a percentage
of finance receivables slipped 74 bps sequentially and 184 bps year
over year to 4.76%.
Further, provision for credit losses declined 31.4% sequentially
and 65.7% year over year to $84.7 million.
Capital Ratios
Capital ratios were strong as of June 30, 2011, with a Tier 1
capital ratio of 19.1% and a total capital ratio of 20.0%, up from
20.1% and 21.0%, respectively, at prior-quarter end.
Book value per share was $44.58 as of June 30, 2011 compared
with $44.85 as of March 31, 2011.
Our Viewpoint
We expect CIT to continue benefiting from its strong capital and
liquidity position. However, the company will have to focus on
top-line improvement; otherwise, its bottom-line will remain under
pressure.
CIT currently retains a Zacks #3 Rank, which translates into a
short-term ‘Hold’ rating. However, one of its competitors,
Dollar Financial Corp. (DLLR) retains a Zacks #2
Rank (a short-term ‘Buy’ rating).
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