It has been about a month since the last earnings report for CIT Group (CIT). Shares have lost about 18.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is CIT due for a breakout? 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 catalysts.
CIT Group Beats on Q2 Earnings, Revenues Down
CIT Group’s second-quarter 2019 earnings from continuing operations of $1.32 per share surpassed the Zacks Consensus Estimate of $1.13. In the prior-year quarter, the company recorded adjusted earnings from continuing operations of $1.00. Notably, the reported quarter did not have any noteworthy items.
Results benefited from stable operating expenses, lower provisions and a modest rise in net interest revenues. However, lower non-interest income was a headwind. Moreover, capital ratios deteriorated during the quarter.
Net income available to common shareholders (GAAP basis) was $128.2 million or $1.33 per share, up from $117.4 million or 94 cents per share in the prior-year quarter.
Revenues Decline, Expenses Stable
Total net revenues (non-GAAP) were $466.8 million, down 11% year over year. Moreover, the figure lagged the Zacks Consensus Estimate of $469 million.
Net interest revenues were $272.8 million, up 1.6% year over year.
Total non-interest income was $319.1 million, decreasing 19.6% from the year-ago quarter.
Net finance margin contracted 24 basis points to 3.13%.
Operating expenses (excluding intangible asset amortization) were $262 million, on par with the prior-year quarter level.
Credit Quality: A Mixed Bag
Provision for credit losses was $29 million, down 12.1% from the year-ago quarter. Also, non-accrual loans decreased 7.2% to $271 million.
However, net charge-offs were $31 million, up substantially from $15 million recorded in the prior-year quarter.
Strong Balance Sheet, Capital Ratios Worsen
As of Jun 30, 2019, interest bearing cash and investment securities amounted to $9.5 billion comprising $1.4 billion in interest bearing cash, and $8.1 billion in investment securities and securities purchased under the agreement to resell.
As of Jun 30, 2019, Common Equity Tier 1 and Total Capital ratios (as calculated under the fully phased-in Regulatory Capital Rules) were 11.6% and 14.3%, respectively, down from 13.2% and 16.0% in the prior-year quarter end.
Share Repurchase Update
During the reported quarter, CIT Group repurchased 3.2 million shares for $158.8 million.
Management expects core and total average loans and leases to increase at a low-single-digit rate.
Net finance margin is projected to lie in the low end of the 3.10-3.30% range.
Core operating expenses (excluding intangible assets amortization) are projected to be flat or rise marginally on a sequential basis.
Further, net efficiency ratio (including the impact of the accounting change) is projected to be in the mid to high 50% range.
Net charge-offs are anticipated to be in the range of 0.35-0.45%.
The effective tax rate is expected to be 25-26% (excluding discrete items).
Management expects core average loans and leases to increase at mid-single-digit growth rate, while total loans and leases are projected to rise in low-single digit rate.
Moreover, net finance margin is projected to be at the low end of 3.10-3.30% range.
Further, core operating expenses (excluding intangible assets amortization) are projected to decline nearly 3%, excluding the impact of changes in accounting rules. After considering these changes, operating expenses will increase 1-2% annually.
Net efficiency ratio is projected to be in the mid 50% range.
Net charge-offs are anticipated to be 0.35-0.45%.
The effective tax rate is anticipated to be 25-26% (excluding discrete items).
Common Equity Tier 1 (CET1) ratio, based on fully phased-in Basel III estimates, is projected to be 11% by fourth-quarter 2019. Further, return on average tangible common equity (ROTCE) is expected to be 11% by fourth-quarter 2019 and 12% by fourth-quarter 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, CIT has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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 these revisions has been net zero. 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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