Why Is CIT (CIT) Down 9.7% Since Last Earnings Report?

It has been about a month since the last earnings report for CIT Group (CIT). Shares have lost about 9.7% 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 Q4 Earnings Beat Estimates, Revenues Up Y/Y

CIT Group’s fourth-quarter 2019 earnings from continuing operations of $1.27 per share surpassed the Zacks Consensus Estimate of $1.11. The figure compared favorably with the prior-year quarter’s earnings from continuing operations, excluding noteworthy items of $1.21. Notably, there were no noteworthy items in the quarter under review.

Results benefited from an improvement in revenues and a decline in provisions. The balance sheet position remained strong in the quarter. However, marginally higher expenses hurt results to some extent.

Net income available to common shareholders was $121.1 million, up from $82.3 million recorded in the prior-year quarter.

For 2019, adjusted earnings from continuing operations of $5.06 per share lagged the Zacks Consensus Estimate of $5.08. The figure compares favorably with $4.04 per share recorded in 2018. Net income available to common shareholders (GAAP basis) for the year was $511 million or $5.27 per share, up from $428.2 million or $3.61 per share recorded in 2018.

Revenues Improve, Expenses Rise

Total quarterly net revenues (non-GAAP) were $461.1 million, up 9.4% year over year. Moreover, the figure surpassed the Zacks Consensus Estimate of $442 million.

For 2019, total net revenues (non-GAAP) were $1.85 billion, down 3.6% year over year. However, the figure surpassed the Zacks Consensus Estimate of $1.83 billion.

Net interest revenues in the quarter were $251.6 million, down 9% year over year.

Total non-interest income was $326.6 million, increasing 17.8% from the year-ago quarter. The rise was due to an increase in other non-interest income.

Net finance margin contracted 38 basis points to 3.01%.

Operating expenses (excluding noteworthy items and intangible asset amortization) were $253 million, marginally up from the prior-year quarter.

Credit Quality: Mixed Bag

Provision for credit losses was $22.6 million, down 27.6% from the year-ago quarter.

However, non-accrual loans increased 15.6% year over year to $326 million. Net charge-offs were $32 million, up 33.3% from the prior-year quarter.

Balance Sheet Strong, Capital Ratios Mixed

As of Dec 31, 2019, average interest bearing cash and investment securities amounted to $9.4 billion, comprising $1.7 billion in interest bearing cash, and $7.7 billion in investment securities and securities purchased under the agreement to resell.

As of Dec 31, 2019, Common Equity Tier 1 (CET1) and Total Capital ratios (as calculated under the fully phased-in Regulatory Capital Rules) were 12% and 15.4%, respectively, compared with 12% and 14.8% at the end of the prior-year quarter.

Share Repurchase Update

During the quarter, the company did not repurchase any shares.

Outlook

First-Quarter 2020

Management expects core average loans and leases to increase at a low-single-digit rate.

Net finance margin is projected to be in the low to mid-range of 2.90-3.05%.

Core operating expenses (excluding intangible assets amortization) are projected to increase 25%, reflecting the impact of the Mutual of Omaha bank acquisition as well as seasonally higher employee costs.

Further, net efficiency ratio is projected to be in the 60% range.

Net charge-offs are anticipated to be 0.35-0.45%.

The effective tax rate is expected to be 25-26% (excluding discrete items).

2020

Management expects core average loans and leases (including the Mutual of Omaha bank portfolio) to increase at mid-single-digit growth rate. The acquisition will add $6.3 billion in loans.

Moreover, net finance margin is projected to be in the 2.90-3.05% range.

Core operating expenses (excluding intangible assets amortization, and excluding $80 million of merger and integrations costs related to the acquisition) are projected to be $1.2 billion.

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).

CET1 ratio is projected to be 10.5%. In the fourth quarter of 2020, return on tangible common equity (ROTCE) is expected to be 11%. Over the medium term, the company expects ROTCE of 13-14%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, CIT has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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