NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) for CIT Group Inc. (CIT) and CIT Bank, N.A. (CIT Bank) at 'BB+/B'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
IDRs, VRs, Senior Unsecured Debt and Revolving Credit Facility
The rating affirmations reflect the company's strong franchise positions in middle-market lending, equipment leasing and factoring, stable net finance margins, strong capital levels, a supportive regulatory framework, reduced reliance on wholesale funding sources following the CIT Commercial Air sale, and the continued expansion of deposit funding sources.
Rating constraints include execution risk related to CIT's strategic plan to become a national middle-market bank, led by an executive management team the majority of which has been in place for less than one year. CIT recently engaged Boston Consulting Group to assist it in developing opportunities in key business lines, and the broader strategic plan also involves seeking to improve profitability and return excess capital to shareholders. Other rating constraints include CIT's exposure principally to middle market companies, historically a higher risk customer segment, heightened asset risk associated with cyclical leasing businesses such as railcar leasing, a moderate earnings profile, and the unproven nature of the company's internet deposits (as measured by deposit price sensitivity) in a rising interest rate environment.
CIT continues to make enhancements to its risk management framework, while maintaining its focus on asset-backed transactions, and reducing leveraged loan exposure. Asset quality has been fairly strong, although this has at least partially been a function of the continued relatively benign credit environment. Industry-wide, Fitch expects asset quality and residual value reversion across many consumer and commercial finance asset classes in 2017 after loosening underwriting standards and increased competition post-crisis.
CIT's oil and gas loan exposure, the majority of which is secured by traditional reserve-based lending assets, working capital assets or long-lived fixed assets, comprised a manageable 2.4% of total loans as of Sept. 30, 2016. Approximately 39% of these loans were criticized as of Sept. 30, 2016, down from levels earlier this year. Also of note, CIT's railcar leasing business is impacted by the volatility in the energy sector; as such, Fitch expects that lower demand for crude, coal and steel cars will challenge railcar utilization and lease rates over the outlook horizon.
Net finance margins have ranged between 3.5%-3.7% from year-end 2013 through year-to-date ended Sept. 30, 2016 and are expected to trend to the lower end of this range over the outlook horizon due to challenges in the rail business and run-off of certain legacy consumer mortgages. Return on average common stockholders' equity, which includes income (loss) from discontinued operations, weakened to 5.7% for the year-to-date period ended Sept. 30, 2016 from 10.8% in 2015 and 12.2% in 2014, driven in part by the one-time incurrence of a $230 million interest curtailment reserve in Financial Freedom during the second quarter of 2016 (2Q16). Fitch expects this ratio to stabilize around 10% over the next several years.
CIT Group Inc. and CIT Bank's common equity tier 1 (CET 1) capital ratios on a fully phased-in basis of 13.7% and 13.0%, respectively, as of Sept. 30, 2016 are high relative to those of large regional bank peers but expected to decline over the next several years. CIT continues to adhere to regulatory requirements, as evidenced by its receipt of a non-objection to its amended capital plan from the Federal Reserve Bank of New York under the 2016 Comprehensive Capital Analysis and Review (CCAR).
The integration of OneWest Bank, which was acquired in August 2015, is expected to be completed by 4Q16. In Fitch's opinion, CIT purchased a niche deposit franchise focused on high deposit balances among affluent, older individuals, largely across retail branches in Southern California, direct-to-consumer, and brokered channels. While not building additional bricks-and-mortar retail locations, the company is expanding its digital marketing capabilities. Brokered certificates of deposit (CDs), which were previously a part of legacy CIT Bank, represented 13.5% of total deposits at Sept. 30, 2016, a 100 basis point reduction from the previous quarter-end.
Following the sale of CIT Commercial Air in 1Q17, deposits will increase to 75% of funding from 66% as of Sept. 30, 2016, as Fitch expects that the company will reduce its unsecured debt by approximately $6 billion. That being said, CIT has a concentrated deposit base in Fitch's opinion, with meaningful online deposits, a limited branch network, low commercial deposit levels and exposure to non-FDIC covered balances. Durability of deposits, which include CDs, interest-bearing checking, savings, and money markets/sweeps, in a rising interest rate environment remains unproven.
Separately, CIT continues to manage the process of remediating a material weakness in the Financial Freedom reverse mortgage servicing business, which was formerly a division of OneWest Bank.
CIT's IDR of 'BB+' is equalized with its VR of 'bb+', reflecting Fitch's view that external support cannot be relied upon.
The senior unsecured debt rating is equalized with CIT's IDR of 'BB+' reflecting that existing notes are senior unsecured obligations of the company that rank equally in payment priority with all existing and future unsubordinated unsecured indebtedness of CIT.
The revolving credit facility is unsecured and is guaranteed by nine of CIT's domestic operating subsidiaries. In general, the revolving credit facility ranks equal in right of payment with all existing unsecured indebtedness of CIT, and as such, the rating of the revolving credit facility is equalized with CIT's IDR. The revolving credit facility also includes a minimum guarantor asset coverage ratio covenant that is not shared by CIT's senior unsecured notes. Fitch believes this covenant does not provide sufficient additional protection to the facility to provide uplift to the revolving credit facility's ratings relative to CIT's IDR and senior unsecured debt rating.
KEY RATING DRIVERS
Support Ratings and Support Rating Floors
The Support Ratings of '5' reflect Fitch's view that external support cannot be relied upon. The Support Rating Floors of 'No Floor' reflect Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to CIT.
KEY RATING DRIVERS
Long- and Short-Term Deposit Ratings
CIT Bank's uninsured deposit ratings of 'BBB-/F3' are rated one notch higher than the bank's IDR because U.S. uninsured deposits benefit from depositor preference in the U.S. Fitch believes depositor preference in the U.S. gives deposit liabilities superior recovery prospects in the event of default.
RATING SENSITIVITIES
IDRs, VRs, Senior Unsecured Debt and Revolving Credit Facility
Positive rating momentum would be primarily dependent upon successful execution of CIT's strategic refocus on national commercial lending and leasing resulting in improved and consistent operating performance. Demonstrated credit performance through market cycles in line with expectations, maintenance of appropriate capital levels relative to the company's risk profile and regulatory minimums, and demonstrated durability of deposits in a rising interest rate environment may also contribute to positive rating momentum.
Negative rating momentum could be driven by unsuccessful execution on current strategic objectives which results in a sustained weakness in operating performance and/or insufficient capital generation. Expansion into new business verticals outside CIT's core commercial lending and leasing expertise or outsized growth in new commercial businesses, though not expected by Fitch, may lead to negative rating momentum. Lastly, an inability to successfully manage the increased regulatory requirements or remediate the material weakness in Financial Freedom would also be viewed negatively.
The senior unsecured debt rating and the revolving credit facility rating are equalized with CIT's Long-Term IDR, and therefore are sensitive to any changes in CIT's IDR.
RATING SENSITIVITIES
Support Ratings and Support Rating Floors
CIT's Support Rating and Support Rating Floor are sensitive to Fitch's assumptions around CIT's capacity to procure extraordinary support in case of need.
RATING SENSITIVITIES
Long- and Short-Term Deposit Ratings
CIT Bank's uninsured deposit ratings are rated one notch higher than the company's IDR, and therefore are sensitive to any changes in CIT Bank's IDR. The deposit ratings are primarily sensitive to any change in CIT Bank's Long- and Short-Term IDRs.
Fitch has affirmed the following ratings with a Stable Outlook:
CIT Group Inc.
--Long-Term IDR at 'BB+';
--Short-Term IDR at 'B';
--Viability Rating at 'bb+';
--Senior unsecured debt at 'BB+';
--Revolving credit facility at 'BB+';
--Support Rating at '5';
--Support Rating Floor at 'NF'.
CIT Bank, N.A.
--Long-Term IDR at 'BB+';
--Short-Term IDR at 'B';
---Viability Rating at 'bb+';
---Long-term deposit rating at 'BBB-';
---Short-term deposit rating at 'F3';
---Support Rating at '5';
---Support Rating Floor at 'NF'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
https://www.fitchratings.com/site/re/891051
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884128
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015474
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015474
Endorsement Policy
https://www.fitchratings.com/regulatory
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