Why Is CIT (CIT) Up 4.6% Since Last Earnings Report?
A month has gone by since the last earnings report for CIT Group (CIT). Shares have added about 4.6% 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 the most recent earnings report in order to get a better handle on the important drivers.
CIT Group Records Loss in Q2, Provisions & Costs Rise
CIT Group recorded adjusted loss per share of 62 cents in second-quarter 2020. The Zacks Consensus Estimate was pegged at a loss of 63 cents. The reported figure excluded noteworthy items such as merger and integration-related costs in connection with the acquisition of Mutual of Omaha Bank, and other restructuring charges.
Results were hurt because of a significant increase in provisions, higher expenses and a decline in revenues. Nevertheless, the balance sheet position remained strong in the quarter.
Net loss available to common shareholders (GAAP basis) was $97.6 million or 99 cents per share compared with net income available to common shareholders of $128.2 million or $1.33 per share recorded in the year-ago quarter.
Revenues Decline, Expenses Rise
Total net revenues (non-GAAP) were $410.7 million, down 12% year over year. Moreover, the figure lagged the Zacks Consensus Estimate of $442 million.
Net interest revenues were $244.4 million, down 10.4% year over year.
Total non-interest income was $303.5 million, down 4.9% from the year-ago quarter. The decline was due to a fall in both components of fee income.
Net finance margin contracted 99 basis points year over year to 2.14%.
Operating expenses (excluding noteworthy items and intangible asset amortization) were $295 million, up 12.6% from the prior-year quarter.
Credit Quality Deteriorates
Provision for credit losses increased significantly year over year from $28.6 million to $223.6 million. The figure for the reported quarter reflected the continued adverse impacts of the coronavirus pandemic.
Non-accrual loans increased significantly year over year to $556 million. Net charge-offs were $170 million, up significantly from $31 million recorded in the prior-year quarter.
Balance Sheet Strong, Capital Ratios Worsen
As of Jun 30, 2020, average interest bearing cash and investment securities amounted to $13.8 billion, comprising $8.1 billion in interest bearing cash, and $5.7 billion in investment securities and securities purchased under the agreement to resell.
As of Jun 30, 2020, Common Equity Tier 1 and Total Capital ratios (as calculated under the fully phased-in Regulatory Capital Rules) were 10% and 13.2%, respectively, compared with 11.6% and 14.3% at the end of the prior-year quarter.
Outlook
Net finance margin is expected to improve 10-20 bps in the third and fourth quarters of 2020.
Given the increase in factoring commissions, other non-interest income is expected to improve 5-10% in the remaining two quarters of this year.
In the third quarter, average loans and leases are expected to remain flat on a sequential basis.
The company is poised to realize $25 million of its 2021 cost synergies target related to the acquisition of Mutual of Omaha Bank ahead of schedule. Thus, it lowered 2020 operating expense guidance. Now, operating expenses, excluding noteworthy items and intangible asset amortization, are anticipated to be $1.185 billion in 2020.
Assuming that there is no significant change in the current or forecasted macro environment or any expected credit performance of the company’s portfolio, it is expected to generate modest positive earnings in the third and fourth quarters of 2020.
The company expects a modest reduction in net rail yields over the next two quarters as leases continue to re-price down. Also, utilization is expected to push back up into the low 90% area over the next few quarters and improve to the mid 90% area by the end of 2021.
Provisions are expected to continue to decline in the third quarter and further in the last quarter of this year, assuming no significant change in the macro environment.
In the fourth quarter of 2020, the company expects to record an impairment charge of $15 million, with an estimated payback period of 18 months or less.
CET1 ratio is expected to be 9.8-10% for 2020.
Effective tax rate (excluding discrete items) is anticipated to be 27-28%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -61.35% due to these changes.
VGM Scores
At this time, CIT has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise CIT has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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