CIT Group Inc.’s (CIT) first quarter 2011 earnings came in at 33 cents per share, widely beating the Zacks Consensus Estimate of 20 cents. However, this compares unfavorably with prior quarter’s earnings of 37 cents and the prior-year quarter’s restated earnings of 72 cents.
Though the quarter's results benefited from lower interest and non-interest expenses along with decreased provision for credit losses, a substantial deterioration of net interest revenue was the downside. A reduction in cost of capital and improved book value were striking during the quarter.
Net income for the reported quarter came in at $65.6 million, down 12% from $74.8 million in the prior quarter and 55% from $144.6 million in the year-ago quarter.
Quarter in Detail
On a non-GAAP basis, total net revenue came in at $475.3 million, down 6% from $505.8 million in the prior quarter and 30% from $676.8 million in the year-ago quarter. Lower net finance revenues were primarily responsible for the decrease in total revenue. Revenues also nowhere near the Zacks Consensus Estimate of $661.0 million.
Net interest revenue deteriorated to negative $55.7 million from positive $50.3 million in the prior quarter and positive $273.3 million in the year-ago quarter. A much lower total interest income more than offset the decrease in total interest expense.
Net finance revenue as a percentage of average earning assets came in at 2.24%, down from 3.04% in the prior quarter and 4.67% in the prior-year quarter. This includes a benefit of 1.13% from fresh start accounting (FSA). Excluding FSA and the effect of prepayment penalties on high-cost debt, the marginincreased 90 basis points (bps) sequentially and 75 bps year over year to 1.46%.
Operating expenses decreased 13% from the prior quarter and 17% year over year to $216.4 million. The sequential decline primarily reflects decreased professional fees and lower provision for severance and facilities exiting activities.
Net charge-offs were $140.6 million, down 22% from $179.5 million in the prior quarter but up 81% from $77.5 million in the prior-year quarter. The reduction from the prior quarter was driven primarily by Vendor Finance, reflecting credit quality improvements.
CIT’s non-accrual loans decreased 19% sequentially and 32% year over year to $1.3 billion. This reflects an improvement in Corporate Finance. Provision for credit losses decreased 32% sequentially and 45% year over year to $123.4 million.
Net charge-offs decreased 39 bps sequentially but increased 144 bps year over year to 2.34% of average finance receivables. Non-accruing loans declined 110 bps sequentially and 39 bps year over year to 5.50% of finance receivables.
Capital ratios were strong as of March 31, with a Tier 1 capital ratio of 20.1% and a total capital ratio of 21.0%, up from 19.1% and 19.9%, respectively, at the end of the prior quarter. The improvement in capital ratios resulted from a decline in risk-weighted assets.
Book value per share was $44.85 as of March 31, compared with $44.48 as of December 31, 2010.
We expect CIT to continue to benefit from its strong capital and liquidity position. However, the company will have to focus on top-line improvement. Failure to do so will continue to keep the bottom-line under pressure.