It has been about a month since the last earnings report for CIT Group (CIT). Shares have added about 0.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is CIT due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
CIT Group Q3 Earnings Meet Estimates, Revenues Rise Y/Y
CIT Group’s third-quarter 2018 adjusted earnings from continuing operations of $1.15 per share were in line with the Zacks Consensus Estimate. Also, the bottom line was above the prior-year quarter’s figure of $1.02.
Results benefited from an increase in non-interest income and lower operating expenses. However, drastic rise in provision for credit losses and lower net interest income were on the downside.
After considering several non-recurring items, net income was $132 million or $1.15 per share, down from $220 million or $1.61 per share in the prior-year quarter.
Revenues Rise, Expenses Decline
Total net revenues for the quarter were $475.6 million, up 3% year over year. However, the figure missed the Zacks Consensus Estimate of $492 million.
Net interest revenues were $259.7 million, down 6% year over year.
Total non-interest income was $350.5 million, increasing 11% from the year-ago quarter.
Net finance margin decreased 10 basis points to 3.43%. The fall was largely owing to higher funding costs and lower net purchase accounting accretion.
Operating expenses (excluding restructuring costs and intangible assets amortization) were $257.3 million, down 4% from the prior-year quarter.
Credit Quality: A Mixed Bag
Provision for credit losses was $38.1 million, up 27% from the year-ago quarter. The rise was mainly due to asset growth. Also, non-accrual loans increased 20% to $318.1 million.
However, net charge-offs were $26 million, down 38% from the prior-year quarter.
Strong Balance Sheet & Capital Ratios
As of Sep 30, 2018, interest bearing cash and investment securities amounted to $7.7 billion, comprising $1.2 billion in interest bearing cash and $6.5 billion in investment securities. Further, there was approximately $0.2 billion of non-interest-bearing cash.
As of Sep 30, 2018, Common Equity Tier 1 and Total Capital ratios were 12.3% and 15.1%, respectively, as calculated under the fully phased-in Regulatory Capital Rules compared with 14.0% and 15.7% in the prior-year quarter.
Share Repurchase Update
During the reported quarter, CIT Group repurchased 5.5 million shares for $291 million.
CIT Group expects AEA to decline compared with the previous quarter as low single-digit growth in core average loans and leases are more than offset by run-off in LCM portfolio and the sale of NACCO.
The company expects net finance margin to tend toward flat to middle of the range between 3.20-3.40%, depending on the timing of the sale of the reverse mortgages.
The company expects operating expenses (excluding restructuring costs and intangible assets amortization) to decrease.
Net charge-offs (excluding discrete items) are anticipated to be in the 0.35-0.45% range.
Effective tax rate is anticipated to be in the 26 range (excluding discrete items).
The sale of NACCO is now expected to result in a pre-tax gain of almost $30-$35 million.
Management expects to incur a pre-tax charge of nearly $70-$75 million on the total return swap termination. Further, about $15-$20 million in pre-tax charges are expected to be incurred related to unsecured debt extinguishment.
Management expects AEA to remain flat compared with 2017 as mid-single-digit growth in core average loans and leases are offset by the sale of NACCO and the reverse mortgages as well as the runoff of the legacy consumer mortgage portfolio.
Moreover, net finance margin is projected to lie in the range 3.20-3.40%. Lower net purchase accounting accretion from the runoff of the legacy portfolios and the sale of the reverse mortgage portfolio are expected to be partially offset by net benefits from higher interest rates.
Further, the company remains on track to achieve its operating expenses (excluding restructuring charges and intangible assets amortization) target of $1.05 billion, down year over year driven by lower compensation and benefit costs and professional fees. Also, net efficiency ratio is projected to be in the mid 50% range.
Net charge-offs are anticipated to be in the range of 0.35-0.45%.
The effective tax rate is anticipated to be nearly 26-28% (excluding discrete items).
Common Equity Tier 1 (CET1) ratio, based on fully phased-in Basel III estimates, is projected to be near the upper end of 11.5-12% range and return on average tangible common equity (ROTCE) is expected to be 9.5-10% by 2018-end.
Over the medium term, CET1 is expected to be at the high end of 10-11% range and ROTCE is anticipated to be in the range of 11-12%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, CIT has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise CIT has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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