Zacks_Analysts' Blog : CIT Reports Loss on Lower Revenue - Analyst Blog

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).