CIT Group (CIT) second quarter earnings came in at 71 cents per share, substantially ahead of the Zacks Consensus Estimate of 30 cents. This also compares very favorably with prior quarter’s earnings of 49 cents.
Results for the quarter benefited primarily from higher non-spread revenue. Also, the quarter experienced gains on sales of assets and recoveries of charged-off receivables. However, higher operating expenses and increased provision for credit losses were the downside. CIT retained its strong liquidity and capital position during the quarter.
On a non-GAAP basis, total revenues for the reported quarter came in at $751.2 million, up 27.7% from $588.1 million in the prior quarter. Revenues also surpassed the Zacks Consensus Estimate of $645.0 million. Better-than-expected revenues were primarily aided by higher gains on loan and portfolio sales and recoveries of charged-off receivables.
Quarter in Detail
Net income for the reported quarter came in at $142.1 million, up 46.0% from $97.3 million in the prior quarter. Net income for the reported quarter included pre-tax net accretion and lower depreciation of $407 million, related to the fresh start accounting (FSA) balance sheet adjustments in December 2009.
Net interest revenue decreased 14.8% sequentially to $179.9 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 4.03%, down from 4.09% in the prior quarter. This includes a benefit of 3.72% from FSA. Non-spread revenue also benefited from gains on loan and asset sales.
Operating expenses increased 5.8% from the prior quarter to $277.0 million. Expenses related to an employee retention program established in the prior quarter more than offset the declines in all the other expense line items.
CIT’s provision for credit losses increased 39.7% from the prior quarter to $260.7 million. The increase in provision reflects non-specific reserves and some incremental deterioration on loans previously discounted in FSA.
The credit metrics, after the application of fresh start accounting (post-FSA), deteriorated significantly during the quarter. Net charge-offs for the reported quarter increased 151.3% from the prior quarter to $106 million. Non-accrual loans increased 6.2% from the prior quarter to $2.1 billion.
The increase in non-accrual loans was driven primarily by Corporate Finance. Net charge-offs increased 88 basis points (bps) sequentially to 1.37% of average finance receivables. Also, non-accruing loans increased 108 bps sequentially to 7.11% of finance receivables.
Capital ratios were strong as of June 30, 2010 with a Tier 1 capital ratio of 17.2% and a total capital ratio of 17.9%, up from 15.5% and 15.9%, 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.
On November 1, 2009, CIT filed for bankruptcy protection after it failed to restructure outstanding debt and could not pay its bills. Its finances were hit by the credit market collapse and rising defaults among its customers.
CIT received $2.3 billion from the U.S. government’s Troubled Asset Relief Program in December 2008, but the aid was scrapped when the company filed for bankruptcy.
We expect CIT to continue to benefit from its strong capital and liquidity position. Solid performances of its Commercial and Corporate Finance segments also augur well going forward. However, the company will have to focus on expense management. Failure to do so will continue to put pressure on the bottom-line. A worsening credit quality also remains a major concern for the company.
CIT currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating.