It has been about a month since the last earnings report for CIT Group (CIT). Shares have added about 4.3% 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 Q2 Earnings Beat, Provisions Surge
CIT Group’s second-quarter 2018 adjusted earnings from continuing operations of $1.00 per share surpassed the Zacks Consensus Estimate of 97 cents. Also, this was above the prior-year quarter’s figure of 68 cents.
Results benefited from stable net interest income, an increase in non-interest income and lower operating expenses. However, drastic rise in provision for credit losses was an undermining factor.
After considering several non-recurring items, net income was $127 million or 94 cents per share, compared with $157 million or 85 cents per share in the prior-year quarter.
Revenues Rise, Expenses Decline
Total net revenues for the quarter were $524.4 million, up 11% year over year. The figure beat the Zacks Consensus Estimate of $483 million.
Net interest revenues were $268.4 million, relatively stable year over year.
Total non-interest income was $396.7 million, increasing 18% from the year-ago quarter.
Net finance margin increased 30 basis points to 3.37%.
Operating expenses (excluding restructuring costs and intangible assets amortization) were $261.5 million, down 9% from the prior-year quarter.
Credit Quality: A Mixed Bag
Provision for credit losses came in at $33 million, up significantly from $4 million recorded a year ago. Also, non-accrual loans increased 14% year over year to $292 million.
However, net charge-offs were $15 million, down 45% from the prior-year quarter.
Strong Balance Sheet & Capital Ratios
As of Jun 30, 2018, interest bearing cash and investment securities amounted to $9.4 billion, comprising $3.3 billion in interest bearing cash and $6.1 billion in investment securities. Further, there was approximately $0.2 billion of non-interest-bearing cash.
As of Jun 30, 2018, Common Equity Tier 1 and Total Capital ratios were 13.2% and 16.0%, respectively, as calculated under the fully phased-in Regulatory Capital Rules compared with 14.4% and 16.2% in the prior-year quarter.
Share Repurchase Update
During the reported quarter, CIT Group repurchased 12.5 million shares for $680 million.
Additionally, the company announced an additional capital return of up to $750 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 flat to middle of the range between 3.20-3.40%, depending on the timing of the sale of the reverse mortgages.
Other non-interest income is expected to decline from lack of reverse mortgage activity and other non-recurring items.
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).
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%, while provisions are expected to be in the range of 30-40 million.
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 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 11.5-12%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, CIT Group has a poor Growth Score of F, however its momentum is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% 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.
Zacks style scores indicate that the company's stock is suitable for value and momentum investors.
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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