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A month has gone by since the last earnings report for CIT Group Inc. CIT. Shares have added about 5.4% in that time frame.
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 Q1 Earnings Lag, Provisions Up
CIT Group’s first-quarter 2018 adjusted earnings from continuing operations of 74 cents per share lagged the Zacks Consensus Estimate of 96 cents. However, this was above the prior-year quarter’s figure of 54 cents per share.
Results were adversely impacted by a decline in net interest revenues and higher provision for credit losses. These were partly offset by lower expenses, a rise in non-interest income and a strong balance sheet.
After considering several non-recurring items, the company reported net income of $97 million or 74 cents per share, down from $180 million or 88 cents per share in the prior-year quarter.
Revenues Stable, Expenses Decline
Total net revenues for the quarter were $495 million, relatively stable year over year. The figure surpassed the Zacks Consensus Estimate of $481 million.
Net interest revenues were $270.7 million for the quarter, down 7.5% from the prior-year quarter.
Total non-interest income was $358.3 million, increasing 8.4% from the year-ago quarter.
Net finance margin decreased 12 basis points to 3.45%.
Operating expenses (excluding restructuring costs and intangible assets amortization) were $275.3 million, down 5.1% from the prior-year quarter.
Credit Quality: A Mixed Bag
Net charge-offs were $50 million, surging 78.6% from the prior-year quarter. Also, provision for credit losses came in at $69 million, increasing 38% year over year. The rise was mainly due to a $22 million charge-off of a single commercial exposure and a higher level of reserves primarily within the Commercial Finance division of Commercial Banking.
However, non-accrual loans decreased 8.5% year over year to $237 million.
Strong Balance Sheet & Capital Ratios
As of Mar 31, 2018, interest bearing cash and investment securities amounted to $10.1 billion, comprising $3.9 billion in interest bearing cash and $6.2 billion in investment securities. Further, there was approximately $0.2 billion of non-interest-bearing cash.
As of Mar 31, 2018, Common Equity Tier 1 and Total Capital ratios were 14.0% and 16.7%, respectively, as calculated under the fully phased-in Regulatory Capital Rules compared with 14.3% and 15.1% in the prior-year quarter.
Share Repurchase Update
During the reported quarter, CIT Group repurchased 3.7 million shares for $195 million.
CIT Group expects AEA to remain flat compared with the previous quarter as low single-digit growth in core average loans and leases are offset by run-off and asset sale in non-core portfolios.
Also, the company expects net finance margin to tend toward middle to upper end of the range between 3.20-3.40%, depending on the timing of the sale of the reverse mortgages.
The company expects negative net interest income from the indemnification assets to decrease modestly each quarter until the indemnification asset amortizes over the remaining contract period till March 2019.
The company expects operating expenses (excluding restructuring costs and intangible assets amortization) to decrease driven seasonally higher employee expenses recorded in the first quarter.
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 company anticipates to recognizing a pre-tax gain of $25-$35 million (net of transaction costs) at closing Financial Freedom servicing operations sale in the second quarter.
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.
The company expects non-interest income to remain flat or increase modestly year over year, as income from the BOLI investments and changes in Low Income Housing Tax Credit accounting mostly offset lower gains on sale of loans and investment securities.
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%, while provisions are expected to be in the range of 30-40 million.
Notably, the effective tax rate is anticipated to be nearly 26-28% (excluding discrete items).
Management expects purchase account accretion (PAA) to continue declining as the portfolios run off. At the end of first quarter 2018, the company had nearly $700 million in total PAA remaining. Of this, $615 million relates to the legacy consumer mortgage portfolio, which runs off at roughly 10-15% annually. The remaining $85 million pertains to Commercial Finance and Real Estate Finance, of which 40-50% is expected to accrete over the next four quarters.
Common Equity Tier 1 (CET1) ratio, based on fully phased-in Basel III estimates, is projected to be around 11.5-12% 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 an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower.
CIT Group Inc. Price and Consensus
CIT Group Inc. Price and Consensus | CIT Group Inc. Quote
At this time, CIT has a poor Growth Score of F. Its Momentum is doing a bit better with a D. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, CIT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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