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Fitch Affirms CIT Group Inc.'s Long-Term IDR at 'BB+'; Outlook Stable
November 28, 2017 / 9:10 PM / 20 days ago

Fitch Affirms CIT Group Inc.'s Long-Term IDR at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, November 28 (Fitch) Fitch Ratings has affirmed the 'BB+' Long-Term Issuer Default Ratings (IDRs) and 'B' Short-Term IDRs for CIT Group Inc. (CIT) and CIT Bank, N.A. (CIT Bank). 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, Revolving Credit Facility and Hybrid Securities The rating affirmations reflect the company's strong franchise position in middle market lending, equipment and real estate finance, rail leasing, and factoring. The rating also considers CIT's stable net finance margins, strong capital levels, a supportive regulatory framework, and solid progress on selling non-core assets and reducing wholesale funding reliance. Rating constraints include execution risk related to completing CIT's strategic plans, which include reducing operating expenses, generating improved overall profitability, and shifting its funding mix towards non-maturity deposits and away from higher-cost brokered deposits. The ratings are further constrained by CIT's exposure principally to middle market companies, historically a higher risk customer segment, and heightened asset risk associated with cyclical businesses such as railcar leasing and commercial real estate (CRE) lending. CIT has strong capital ratios, which in part reflect the lower credit quality of its borrowers and lessees. CIT and CIT Bank's fully phased-in CET 1 capital ratios of 14.0% and 13.7%, respectively, as of Sept. 30, 2017, are high relative to large regional bank peers but expected to decline over the next several years towards the upper end of a 10% to 11% target range. Fitch views these targets as adequate for the rating level in the context of CIT's balance sheet risk. Furthermore, the company has a sound risk management framework. It uses a combination of capital metrics and thresholds to measure capital adequacy and in June 2017 it received a non-objection to its capital plan from the Federal Reserve Bank of New York under the 2017 Comprehensive Capital Analysis and Review. Asset quality has been appropriate, although this has partially been a function of the continued relatively benign credit environment. Non-accrual loans represented approximately 0.9% of total loans for the period ended Sept. 30, 2017 and net charge-offs from continuing operations excluding noteworthy items increased slightly to 0.37% in 3Q17 from 0.28% in 3Q16. Fitch does not expect material asset quality worsening for U.S. banks in 2018, but rather a gradual normalization back to long-run historical measures of non-performing loans and loan losses. For CIT's railcar leasing portfolio, weak rail prices are expected to continue to negatively impact rail yields into 2018. Overall earnings continue to be impacted by various one-time items. In 3Q17, these items related to a deferred tax benefit from a restructuring of an international legal entity and adjustments concerning the pending sales of Financial Freedom (the reverse mortgage servicing business), the reverse mortgage loan portfolio, and NACCO (the European rail leasing business), among others. Other major one-time items this year related to the sale of the Commercial Air business and liability management actions. Overall earnings stability would positively impact the ratings. On a core basis, however, net finance margins (NFM) slightly decreased to 3.46% in 3Q17 from 3.51% in 3Q16. NFM is expected to trend in a range of 3.0% to 3.5% over the outlook horizon due to lower purchase accounting accretion and challenges in the rail portfolio, which is mitigated by an expected increase in investment securities and reduction in funding costs. Return on average tangible common stockholders' equity (ROTCE), excluding noteworthy items, was 9.20% in 3Q17, compared to 8.54% in 3Q16, though this does include favorable tax adjustments during the quarter. Fitch believes CIT's 10% ROTCE target may be difficult to achieve in 2018 due to a challenging loan growth environment and NFM headwinds. Over the longer term, this goal appears reasonable and will likely be dependent on CIT's ability to execute on its expense control and deposit gathering strategies, as well as manage asset quality and optimize capital levels. CIT's ability to execute on these initiatives and drive core earnings improvement would be a positive rating driver should it occur. Since the OneWest Bank acquisition in August 2015, CIT continues to refine its deposit strategy, which is currently focused on building long-term relationships with customers that are not highly rate sensitive. A demonstrated durability of deposits in a rising interest rate environment may contribute to positive rating momentum. Deposits represented 78% of total funding as of Sept. 30, 2017, up from 67% at year-end 2015. As of Sept. 30, 2017, 49.3% of CIT's deposits were time deposits, which is high relative to peers and results in higher deposits costs for CIT. The branch bank (40% of deposits as of Sept. 30, 2017) is targeting non-maturing deposits for consumers and small businesses. The online bank (38%) is shifting its deposit mix from higher beta certificates of deposits to lower beta non-maturing deposits. The company also lowered its higher cost brokered deposit base to 13% as of Sept. 30, 2017 from 20% as of Sept. 30, 2016. Lastly, CIT has a small commercial deposit base (9%), which in Fitch's opinion is limited by the relatively weak credit quality and the constrained liquidity profiles of CIT's middle market customers. 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, which is currently unused, is unsecured and is guaranteed by eight 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 preferred stock is rated four notches lower than CIT's Viability Rating (VR) of 'bb+'. The preferred stock rating includes a combined four notches for loss severity given the securities' deep subordination in the capital structure and non-performance given that the coupon of the securities is non-cumulative and fully discretionary. 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, Revolving Credit Facility and Hybrid Securities Positive rating momentum would be primarily dependent upon successful execution of CIT's strategic refocus on national commercial lending resulting in consistent operating performance and the achievement of profitability targets. Demonstrated credit performance through market cycles in line with expectations, maintenance of appropriate capital levels relative to the company's risk profile, 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. 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. An inability to successfully manage increased regulatory requirements 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. CIT's preferred stock rating is primarily sensitive to downward changes in CIT's VR. An upward change in CIT's VR would not necessarily lead to a change in the preferred stock rating, as downward notching for preferred stock increases to five from four for 'bbb-' and higher rated issuers. 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. 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+'; --Preferred stock at 'B'; --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'. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Christopher Van Bell Associate Director +1-212-908-0777 Committee Chairperson Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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