We have maintained our long-term “Neutral” recommendation on CIT Group Inc (CIT) on the back of its fourth-quarter 2011 results and initiatives undertaken to lower its cost of capital. However, sluggish growth in the industries, where CIT provides finance, could mar the company’s growth prospects.
CIT’s fourth-quarter 2011 earnings were significantly ahead of the Zacks Consensus Estimate. The results benefited from improvement in credit quality and decline in operating expenses. However, a fall in the top line along with higher interest expenses were the primarily dampeners.
CIT has been aggressively restructuring its liability profile through repayment and refinancing of high cost debt. Since 2010, the company has been lowering its debt structure by either eliminating or refinancing nearly $23.5 billion of first lien and second lien debt. This will also enable it to provide more flexible financing to small and mid-sized organizations.
For improving profitability, CIT has been curtailing operating expenses. The company’s non-interest expenses declined by nearly 13% in 2011 compared with the prior-year period, mainly due to lower employee expenses. Meanwhile, the head count reduction is envisioned to continue until the economic growth gains momentum, thereby supporting the bottom line to some extent.
CIT has been continuously trying to expand its market share. Last year, the company announced the launch of CIT Real Estate Finance (:REF) business and an online bank. These initiatives will contribute to the company’s revenue growth going forward.
On the flip side, CIT faces uncertainties on the regulatory front. Though the impact of the Dodd-Frank Wall Street Reform Act and Basel III liquidity regulation are still uncertain, we anticipate CIT’s revenue growth and expenses to get affected negatively.
Further, expected sluggish growth in the sectors like commercial airlines, students and manufacturing industry (57% of its total lending as of December 31, 2011) could hamper CIT’s growth prospects moving ahead, as the borrowers may not be able to make timely payment of loans and interest.
Despite sturdy balance sheet of CIT and as it is well poised to return capital to its shareholders in the form of dividend payouts and share repurchases, the company is not allowed to declare dividends per the terms of the Written Agreement. This is a big hindrance in CIT’s plan to attract investors.
CIT currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, one of its peers Orix Corp. (IX) retains a Zacks #2 Rank (short-term ‘Buy’ rating).
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