Q3 2011 CIT Group Inc Earnings Conference Call on Oct. 25. …€¦ · Oct. 25. 2011 / 12:00PM, CIT...

F I N A L T R A N S C R I P T

CIT - Q3 2011 CIT Group Inc Earnings Conference Call

Event Date/Time: Oct. 25. 2011 / 12:00PM GMT

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C O R P O R A T E P A R T I C I P A N T S

Ken BrauseCIT Group Inc. - EVP, IR

John ThainCIT Group Inc. - Chairman & CEO

Scott ParkerCIT Group Inc. - EVP & CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Mark DevriesBarclays Capital - Analyst

Mike TaianoSandler O'Neill - Analyst

Moshe OrenbuchCredit Suisse - Analyst

Henry CoffeySterne, Agee & Leach - Analyst

Ken BruceBank of America-Merrill Lynch - Analyst

Brad BallEvercore Partners - Analyst

David HochstimBuckingham Research - Analyst

Chris BrendlerStifel Nicolaus - Analyst

Sameer GokhaleKeefe, Bruyette & Woods - Analyst

Don FandettiCiti - Analyst

John StilmarSunTrust Robinson Humphrey - Analyst

Mike TurnerCompass Point - Analyst

P R E S E N T A T I O N

Operator

Good morning and welcome to CIT's third-quarter 2011 earnings conference call. My name is Modesta and I will be your operatortoday. At this time, all participants are in a listen-only mode. There will be a question-and-answer session later in the call.(Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to Ken Brause,Director of Investor Relations. Please proceed, sir.

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Oct. 25. 2011 / 12:00PM, CIT - Q3 2011 CIT Group Inc Earnings Conference Call



Ken Brause - CIT Group Inc. - EVP, IR

Well, thank you, Modesta and good morning, everyone and welcome to CIT's third-quarter 2011 earnings conference call. Ourcall today will be hosted by John Thain, our Chairman and CEO and Scott Parker, our CFO. We will have a question-and-answersession following our prepared remarks. We do ask that you limit yourself to one question and a follow-up and then return tothe queue if you have additional questions. We will do our best to answer as many questions as possible in the time we havethis morning.

Elements of this call are forward-looking in nature and may involve risks, uncertainties and contingencies that may cause actualresults to differ materially from those anticipated. Any forward-looking statements relate only to the time and date of this call.We disclaim any duty to update these statements based on new information, future events or otherwise. For information aboutrisk factors relating to our business, please refer to our 2010 Form 10-K that was filed with the SEC in March.

Any references to certain non-GAAP financial measures are meant to provide meaningful insight and are reconciled with GAAPin our press release. And for more information on CIT, please visit the Investor Relations section of our website at www.cit.com.I would now like to turn the call over to John Thain.

John Thain - CIT Group Inc. - Chairman & CEO

Thank you, Ken. Good morning, everyone and thank you for being on the call. Despite a difficult economic environment andvolatility in the marketplace, CIT had a good third quarter.

Our volume was up sequentially across all of our business segments. We originated $2.3 billion of new loan commitments, ofwhich $1.9 billion was funded. Our credit metrics improved. Our charge-offs, non-accruals and inflows into non-accrual all weredown.

We continue to make progress on restructuring our debt.We repaid the $3 billion first lien term loan.We put in place a new $2billion revolver with a much lower cost and we redeemed all of the 2014 maturity Series A debt; although a piece of that wasdone in October, but with the reduction of that 2014 debt, most of the restrictive covenants were released. And we also tookadvantage of the disruptive market and repurchased about $0.75 billion of our Series A debt in the market at a discount.

As you all know, we launched CIT's Internet bank. That went off very successfully. It has only been five days, but it has beenraising deposits and we originated 80% of our US loan volume in CIT Bank. Those of you who would like to make a deposit,please go to BankOnCIT.com.We are very happy to take your money.

Our operating expenses were in line for the quarter and if you go across our businesses, Corporate Finance, we originated $1.2billion of new commitments in the quarter to over 65 borrowers. So we are in fact lending to small and middle market companies.Our Vendor business, which is also mostly small and middle market companies, funded over $600 million in new volume. OurTrade Finance business, which is our factoring business for very small companies, our factoring volume was up in the quarter.And on the Transportation side, our commercial aircraft, 100% of our planes were leased and all of our new deliveries in thenext 12 months are leased. On the Rail side, our utilization of railcars was 97%, but if you excluded center beams, which are thecars that are used for hauling lumber, the utilization rate was over 99%.

So if you looked at our businesses, and our business is obviously just a snapshot, but it is a mix of business on the commercialside. If you looked at our businesses, we do not see a double-dip recession in the US. We see slow growth in the US, but stillpositive. And then in our businesses outside the US, particularly Asia and Latin America, we see faster growth.

We are continuing to make progress completing the written agreement items.We are continuing to work to complete the vastmajority of them by the end of the year and we are happy with the progress that we made in the quarter.

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With that, I will turn it over to Scott.

Scott Parker - CIT Group Inc. - EVP & CFO

Thank you, John and good morning, everyone.

We reported a net loss of $16 million, or $0.08 per share on pretax income of $14 million. Pretax income included $169 millionof costs associated with our liability restructuring actions. Excluding these costs and the net FSA accretion benefits, pretaxearnings were $89 million, up from $17 million in the second quarter on the same basis with the improvement driven by lowerfunding and credit costs.

First, I would like to make sure everyone understands how the costs related to the debt actions impacted the P&L.We added atable in the last page of the press release in the non-GAAP disclosures that I would like to walk you through.

It starts with reported pretax income. The next line is net FSA accretion, excluding the impact of debt prepayments, which istrending down as the remaining accretable discount on loans declines. The accretable discount on loans was just over $800million at quarter-end.

Next, the negative impact of accelerating the FSA discount on debt we repaid last quarter was $113 million. Remember, weprepaid $2.5 billion of Series A debt in the second quarter. This quarter, the cost was only $2 million. The negative impact ofaccelerating the discount on the Series A debt was offset by the benefit of accelerating the FSA premium that remained on thefirst lien debt.

Prepayment penalties, which also flow through interest expense, were $20 million this quarter, 2% of the $1 billion we prepaid,down from $50 million last quarter.

The last line titled Loss on Debt Extinguishment reflects the write-off of unamortized original issue discount and fees associatedwith refinancing the first lien debt. So as you can see from the table, pretax income, excluding FSA accretion and debt-relateditems, improved.

Total assets decreased $3.5 billion, largely reflecting the use of cash and short-term investments to pay down debt. Financingleasing assets declined over $0.5 billion, about $400 million in the commercial portfolio and $150 million in the consumer book.With respect to the commercial portfolio, as John mentioned, we funded $1.9 billion of new business volume, which effectivelyoffset collections and depreciation. However, we sold more than $700 million of assets, including $300 million in Transportationequipment, $200 million of Corporate Finance loans and $200 million of Vendor Finance assets.

Turning to the income statement, net finance margin, excluding FSA and prepayment penalties, was 160 basis points, up 15basis points sequentially. Lower funding costs were clearly the most significant driver of economic margin improvement.Whileour liability restructuring actions reduced our cost of debt, we also had reduced benefit from a total return swap.

Pre-FSA asset yields were stable, benefiting from lower depreciation expense since depreciation is suspended on equipmentdesignated as held for sale. The benefit to the margin was largely offset in other income as we marked down the value of theequipment.

Other income was $235 million, down slightly from the second quarter.The decline was driven by lower fees and other revenue,including the equipment write-downs I just mentioned. Non-spread revenue continues to benefit from strong gain on assetsales, but lending-related fees remain challenged given the economic environment.

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Credit metrics continue to improve as charge-offs, non-accrual loans and inflows to non-accruals were down from prior quarterand prior year. These positive trends were reflected in the provision line. The allowance decreased modestly to $414 million,but remained unchanged at 1.9% of finance receivables. Combining the reserve with the remaining nonaccretable discount,coverage against pre-FSA receivables remained flat at 2.3%.

As John mentioned, operating expenses decreased to $220 million, in line with our stated expectations.

And finally on income taxes, we provided $31 million this quarter, which is down slightly from the first-half run rate. Internationalearnings declined due to the sale of Dell Canada in the second quarter and we had $8 million of discrete benefits. In the US, wecontinue to grow the federal NOL and record offsetting valuation allowances against the related deferred tax asset.That is whyit is more meaningful to look at the amount of the tax provision as opposed to the effective rate.

My key business takeaways are - the commercial portfolio stabilized as funded volume effectively offset collections anddepreciation; credit metrics improved; CIT Bank is originating a greater proportion of total funded volume, 80% in the thirdquarter, up from 70% in the second quarter and about 50% a year ago. And margins continue to benefit from our liabilityrestructuring actions.

Now I would like to get into the individual business segments focusing on sequential trends.

Corporate Finance pretax income decreased to $37 million as lower FSA accretion and gains on asset sales offset lower creditand operating costs. New business activity was strong in a typically slower period. Committed volume increased 9% with fundedvolume of roughly $700 million despite a significant decline in the overall middle-market volume.

Finance and Leasing assets fell $240 million due to asset sales and the impact of foreign exchange translations. And the assetsheld for sale remained at $400 million, of which roughly 75% are non-accrual. Committed volume was evenly split betweencash flow and asset-based loans.

Most of the deal flow was to a diverse group of commercial and industrial companies, including JWC Environmental, whichmakes waste processing equipment; Woodcraft Industries, a cabinet manufacturer; PMC Group, a chemical manufacturer; andSteak 'n Shake, a popular restaurant chain.These are very much Main Street America companies and deals in the center of ourstrike zone.

Also, we are seeing good results from the investment in our energy team. Volume this quarter was $230 million, including agood mix of project finance and ABL.

New loan yields are fairly stable; although mix does matter. Pricing on cash flow loans improved over 50 basis points from theprior quarter while ABL pricing experienced some pressure.

We are winning more agency roles, but syndication activity in the middle market is limited as many transactions are stillclub-oriented. Margins continue to be strong as CIT Bank originated over 90% of the US committed and funded volume.

Turning to Transportation Finance, pretax income increased to $100 million on lower interest expense, higher gain on salesand proceeds from an insurance claim.

Financing and leasing assets were up about $100 million as we added a net of six aircraft to the fleet, including scheduleddeliveries and some sale-leaseback transactions. Portfolio lease yields were fairly stable as improvements in rail mitigated someslight compression in aerospace.

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As John mentioned, utilization is strong. All aircraft are leased and rail utilization improved to 97%. Moreover, the next 12 monthsof aircraft deliveries are fully placed and we also placed all of this year's and over three-quarters of next year's scheduled railcardeliveries.

Trade Finance pretax income increased to $11 million. Factoring volume was $6.8 billion, up about 10% from the second quarter,which is a typical seasonal increase and domestic volume increased slightly from a year ago. Commission dollars reflect theincreased volume while commission rates were essentially flat. Credit quality remained stable. Net charge-offs were only $2million. However non-accruals increased $20 million and recoveries were down sequentially impacting both the provision andother income lines.

Finally,Vendor Finance generated $77 million of pretax income. Finance and leasing assets decreased about $270 million, drivenby asset sales.The largest of which was $125 million of underperforming European assets that we sold at a sizable gain. Creditmetrics further improved with non-accrual and net charge-offs down.The latter of which benefited from some unusually largerecoveries.The average portfolio yield increased, benefiting from the suspension of the depreciation on assets held for sale.

New business volume exceeded $600 million, up 10% sequentially and nearly 25% from a year ago, excluding the Dell Canadabusiness we sold last quarter. While the average yield on new business volume was down slightly, CIT Bank originated about75% of the US volume in the third quarter, which helps the margin.

We continue to see strong growth in Asia and Latin America, mainly China and Brazil. In fact, in the third quarter, we bookednearly $200 million of volume in these regions and year-to-date, we have done nearly $0.5 billion. That is roughly one-third ofnew business volume and as John mentioned, these regions are growing significantly faster than the US.

Moving onto funding, we continue to make progress advancing our liability restructuring roadmap.

In addition to the debt repayments we discussed previously, we closed a $2 billion committed bank facility, which was asignificant milestone. The new first lien facility is at a much lower cost, currently LIBOR plus 2.75% with no floor, down fromLIBOR plus 4.50% and a 1.75% floor. Since it is also a revolver as opposed to a term loan, it enables us to more effectively managecash and reduce negative carry. And finally, its covenants are similar to the Series C debt whereby the general lien on collateralfalls away when the Series A debt is repaid.

We issued about $580 million of US CDs at an average cost of 150 basis points with an average turn of over three years.We alsoraised some additional deposits in Brazil and renewed $0.5 billion committed conduit at a lower cost and longer tenor. Bankholding company liquidity remains strong with $4 billion committed and available, including $3.2 billion of cash and short-terminvestments and $800 million of undrawn revolver capacity.

Since the beginning of 2010, we have eliminated or refinanced over $15 billion of first and second lien debt, including the $7.5billion of first lien debt, $6 billion of Series A notes and $2.1 billion of Series B notes. We have lowered our cost of debt andimproved our funding flexibility and are well-positioned to execute the balance of our liability restructuring roadmap.

For instance, now that we have eliminated the 2014 Series A debt, we have removed most of the restrictive covenants and canrealize the benefits of the consent exchange offers. We can now address the capital structure of certain subsidiaries to lowercosts and improve operational flexibility. Furthermore, all the $15 billion of the 7% Series A and C notes are callable at parstarting January 2012. Refinancing the $6.5 billion of remaining Series A debt is a priority because, once it is repaid, our balancesheet largely becomes unencumbered.

We have made a tremendous amount of progress over the past 18 months and will continue to advance against our roadmap.With that, I would like to turn it back to Modesta and take your questions.

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Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions). Mark Devries, Barclays Capital.

Mark Devries - Barclays Capital - Analyst

Thank you. Can you talk about what your target deposit growth strategy is over the next few quarters and also what yourmaturity schedule is on your brokered CDs?


Sure. So the deposit growth will be dependent on asset growth. So in the third quarter, in terms of bank-funded volume, it wasabout $835 million.That got funded with a combination of cash; the bank has about $800 million of cash; brokered CDs, whichScott just gave you the average maturity of the brokered CDs. It was about --


About three years.


About three years and now with our Internet deposits, we have only been raising them for five days, but the Internet depositsare running a little over one year weighted average maturity. And their weighted average cost is about 1.2%. So we will use amixture and then we also have student loans for sale. So it will be a combination of those four funding sources.


So on the brokered CDs, our weighted portfolio is just about three years to match up with some of our asset classes.


Okay. And you also saw some pretty consistent across-the-board credit improvement in the quarter and I think, John, youcommented that you are not seeing a sign of a double-dip in the US. Could you give us a little bit more color on what you areseeing on the credit front?


Well, remember we marked our book down, so we have been kind of working through some of those. On the new business,we have really been focused on the structure of the deals and transactions. We are kind of staying firm in regards to makingsure the structure and pricing are consistent with our underwriting parameters.

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And then, overall, as I said, I think the US economy is growing; it is just growing slowly. It is not creating a lot of jobs, but whenyou look at the utilization rates that we see in rail, when you look at the kind of volume that we are originating across the board,I am more optimistic about the US economy than you would get if you were watching the market or watching CNBC.


Okay. And can you provide us any kind of sense of what we should expect for the provision line over the next couple of years?


We don't kind of give guidance around that, but I think we are trying to get to some of the long-term targets we have alreadylaid out at several conferences. So we would like to be in the provision line somewhere around 100 basis points depending onmix of business.


Okay, that's helpful.Thanks.

Operator

Mike Taiano, Sandler O'Neill.

Mike Taiano - Sandler O'Neill - Analyst

Hi, good morning. I guess given that Series A note paydowns are sort of the priority, given your expectation for cash flows goinginto next year, do you expect that to be a 2012 event for the full $6.5 billion or do you think that more than likely would spillinto the following year?


I would say regular cash flow won't be enough to pay down the $6.5 billion, so it would have to be a combination of somecapital market issuances.We do have alternative liquidity on certain conduits and other structures that we are looking to fill upwith assets and then we will have some of the cash proceeds from some of the asset sales that would be available for kind ofSeries A debt repayment. But I can't say that -- it is hard to figure out whether we can do it all in 2012, but we are focused ondoing it as fast as possible, as well as maintaining a prudent cash balance.


Okay, thanks. And then I guess just a follow-up on the Corporate Finance segment. You had said the fundings were down alittle bit on the asset-based revolvers.What were the primary drivers of that? Just the yields there are getting more competitiveor something else?

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I think it is really on the ABLs, but we had a little bit more ABL than we did in the second quarter. And with those, based oncurrent economics, the start-off funded rate is not at what we have seen historically. And so what we are going to do is hopefullywith economic growth that John talked about and people becoming more confident that those revolvers will be drawn downfor building inventory to finance growth and we just haven't seen that in the last couple of quarters yet. But I don't think -- it isnot a concern for us because we like the credit profile and having a good balance between cash flow and asset-based.


So in other words, it is more customer confidence that is the driver of that than necessarily pricing at this point?


Yes, I mean it is definitely on the funded nature of that. It is really what the customer feels they need to draw when we do theoriginal underwriting. But in regards to pricing, pricing is definitely tighter in the ABL given the credit profile of that versus someof the cash flows I mentioned.The pricing kind of went up a little bit versus the second quarter.


Okay, thanks.

Operator

Moshe Orenbuch, Credit Suisse.

Moshe Orenbuch - Credit Suisse - Analyst

Great, thanks.You mentioned in the release that you had about a 15 basis point improvement in your core margin.What wouldthat look like at the end of the quarter if all of the repayments you had done were fully in place and maybe you can give somecomments about what that might look like in Q3?


In Q4? Well, as we talked about in previous quarters, we still have some items running through the pre-FSA margin line thatkind of distort it and put some noise in there.The main one is the cash collateral prepayments we have experienced on our TRSstructure, total return swap. That will continue to decline in the fourth quarter; it declined significantly in the third quarter asprepayments have slowed down. And as such, some of the improvements from the debt refinancings and payoffs that we havehad are going to be muted into the fourth quarter. And I would say that going into 2012, some of that noise will be out of thereand we will get to more of a steady state.


So the amounts that declined in Q3 and will decline further in Q4 would be about how much?

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25, 30 basis points.


Each quarter?


No, just in the third quarter. So I think it will kind of go down a little bit more in the fourth quarter in regards to the percentage.


But by the same token, you refinanced debt across Q3. So some of that benefit wasn't there yet, so --.


Yes, so if you look at kind of the actions -- we got some of that benefit in the third quarter. It was somewhere around 45 basispoints or something. And then given the payoff of the Series A at the end of the quarter and some of the stuff that we did inOctober, my sense is that will continue to flow through in the fourth quarter, but it'll again be offset by the lower benefit fromthe total return swap.


Got it.Thanks very much.

Operator

Henry Coffey, Sterne Agee.

Henry Coffey - Sterne, Agee & Leach - Analyst

Yes, good morning, everyone and thank you for taking my question. I just wanted to piggyback off of the last questioner.Whenwe are looking at your opportunities for the fourth quarter, you were obviously starting at a very low -- a lower cost of fundsbasis. If you were doing kind of an end-of-period analysis, what would your cost of funds look like right about now? I meangiven everything that had been done and what are the opportunities in the fourth quarter?


Yes, so if you just look at only the coupon, not any of the deferred fees, amortization, but if you just look at the coupon, basedon the actions we have taken to date, it is going to be somewhere below 5%. And so that has come down from over 6% 12, 18months ago. So I think there has been a lot of progress on that front. So as we continue to grow the business in the bank andthen pay off some of the Series A, that will continue to decrease the overall borrowing costs for the Company.

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And John, you mentioned that you were making a lot of progress with your regulators. What is the final implication of that? Iknow when we look at your slides, you have a capital ratio that is significantly lower than your current capital ratio. Can yougive us a sense in 2012? Do we see buybacks, do we see more asset growth? Do we see dividends? Can you give us a sense ofwhat getting a green light from the regulators means in terms of your ability to change things on the capital side?


So the likely change from the Federal Reserve, which is where the written agreement is, is that the written agreement wouldbe replaced with some form of memorandum of understanding and that memorandum of understanding is typically private.There would still be restrictions in that memorandum of understanding and it is not totally clear exactly what they would be,but I would not anticipate that we would be able to pay dividends or buy stock back in 2012. We would, I think, likely needpermission to be able to do that, but I think we would have a greater degree of flexibility in our business.


Thank you.

Operator

Ken Bruce, Bank of America-Merrill Lynch.

Ken Bruce - Bank of America-Merrill Lynch - Analyst

Thanks, good morning. My question gets at some of the earlier questions and I'm hoping just for a little additional color. Irecognize that this is a little bit of a chess game as you can look forward, but if I understand properly, you have got -- on yourasset yields, you have got an acceleration or I should say a better use of asset-backed loans relative to cash flow loans. That ishaving a downward effect or having some pressure on the asset yield. And as you kind of look forward, the best expectationyou have is that as confidence increases, you will start to see some shift, a mix shift away from the asset-based loans. Could yougive us a sense of how you think about that?


No, I don't think we are going to shift away from doing that. I think you're right from a pricing point of view. Right now, if youhave an asset-based loan that is 30% utilized, you are making kind of LIBOR 300, 350 on that balance and then some unusedlines, commitment fees. If that gets drawn up to 50%, 60%, the yield on the asset becomes greater than the unused line fee. SoI think that would be an asset growth perspective, but from an overall portfolio, we want to keep a balance from a risk profileof kind of the -- whether it is 50/50 or 60/40 kind of cash flow ABL kind of mix is something we want to maintain.


Okay. And just as -- if you pull back a bit, obviously, there was quite a bit of consternation in the third quarter related to thecapital markets. Was that, you think, impacting the market from your perspective? It seems like you have accelerated fundingsand commitments maybe a little counterintuitive to what we saw across many other businesses. So I am trying to appreciate,if you will, the dislocation that occurred in the third quarter was playing to you or if it is just organic growth that you see as youkind of reposition the businesses is offsetting that and just get a sense as to the general market environments you are operatingin.

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Yes, I mean we ended the second quarter with a pretty good pipeline of transaction in the Corporate Finance business andthose closed kind of prior to some of the August events. So a lot of that business was already in the pipeline and the customerskind of moved forward those transactions. I think post some of the activities, I think September in our current pipeline is a littlebit down from what we had in the second quarter, but it is still pretty good. And so we still see good activity out there aroundthat. But in respect of the third quarter, definitely some of that was closed in July and early August.


And then also we are seeing a little bit better pricing on the cash flow side, which is a positive.


Right, yes, it seemed like there was enough dislocation that actually it helps out the pricing in that particular area. It seems thatthere is quite a bit of competition where the banks are involved and I think that is what you indicated through the pricing onthe asset-based loans and cash flow-based loans where there is a little less competition has eased up. So if there is a return toI guess the volume on that side that that could be beneficial for your margins overall.


Yes.


Thanks for your time.

Operator

Brad Ball, Evercore.

Brad Ball - Evercore Partners - Analyst

Thanks. Yes, just as a follow-up to the regulatory question. John, you mentioned that you expect to be substantially completewith the written agreement by year-end, which is what you've said in the past. Just what exactly does that mean? What remainsto be addressed in the written agreement? And also just to clarify your response to the prior question. You don't expect anyrestrictions on the business or specifically the business within the bank once the written agreement issues are addressed, isthat correct?


So let's go backwards in terms of the set of questions you asked. Just in terms of the bank, there are no restrictions on the banknow. So the written agreement applies to the holding company. The bank did have a cease and desist on it, which was lifted.So the bank itself is not restricted in terms of its business.

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The written agreement has a laundry list of items; most of them relate to credit, credit grading and the management of creditrisk, compliance and the whole compliance process, and then what I would categorize as problem loan management anddealing with non-accruals, charge-offs, etc. And all of those items we will have substantially completed the issues that are raisedin the written agreement.


Great. And then specifically to the bank, you still have in the bank a very sizable student loan portfolio. I wonder if you couldgive us a sense as to the plan.Will that just continue to run off or do you expect to sell that and if so, what kind of cash proceedswould you expect from that and could those proceeds be potentially used to help pay down the Series A debt that you discussedearlier?


No, well let's separate. So the cash and the assets in the bank we don't dividend up to the parent company. So really we seethese student loans in the bank as kind of a source of funding as we continue to grow our commercial business in the bank. Ithink as we've kind of demonstrated over the last kind of year and a half is that we will selectively, based on the right pricing,selectively sell assets to provide liquidity to fund that growth. So over time, as we grow the commercial assets, we will continueto run it down, as well as selectively sell assets.


Okay, thanks.

Operator

David Hochstim, Buckingham Research.

David Hochstim - Buckingham Research - Analyst

Yes, I wonder if you could give us a little more color on sort of pricing in Corporate Finance and in Transportation Finance overthe last year. I mean can you give us, directionally, how much lease rates and loan rates have changed?


Well, I think on the Corporate Finance side, if you look at cash flow, given some of the dislocation just as we have experiencedin the capital markets, pricing has kind of gone up I think relatively for comparable risks and it has allowed us the opportunityto kind of move up a little bit in some of the credit quality because the pricing there is attractive given what is going on. On theABL, it has kind of been -- it peaked kind of post 2009, but I think it has been playing and hovering in the same spot in the 250,300 range depending on kind of the nature of the assets being secured by the facility. So shorter duration, heavy turnover typeretail clients would probably be on the lower end than some of the other asset classes out there.

On the Transportation side, we have seen rebound in rail that has kind of been quarter-over-quarter as utilization and demandhas picked up. And on the aircraft leasing, it is really aircraft type specific, but, in general, we continue to have our fleet fullyleased or almost fully leased over the last period of time. And pricing really is a derivative of both the aircraft types. So in general,we have maintained good lease pricing in the aircraft side.

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So planes that are being released from five years ago, are lease rates higher or lower?


Well, I mean lease rates are a function of the cost of the equipment. So you could -- one of the tough parts is a five-year assetis depreciated down and so the rate is based on that. So as a factor would probably go down as the equipment gets older, butthe lease percent, because the asset is lower, tends to stay in the realm as a percent basis relative to lease factor and the actualdollars of rent that we collect. So dollars would go down, but the percentage would stay fairly stable.


Okay. And then can you talk a little bit about some of the initiatives to restart some old lines of business? You have talked aboutthat in the past, but how is that going, new kinds of financing?


So we did a couple things. One is we hired a very experienced team of commercial real estate experts who actually just starteda couple of weeks ago and we are reentering the commercial real estate lending area. Although we will do that on a veryconservative basis, making first lien loans with relatively low loan-to-value and in a way that we think plays to our strength,which is primarily lending against assets. And then the other place, which we are restarting, is the equipment finance area wherewe had a core expertise where we continue to have a good knowledge base and again, it plays to our expertise of lendingagainst assets.


And how much could those contribute to loans over the next year? I mean should we start to see commercial loan assets growingin the first or second quarter?


Well, obviously, the goal is to have them grow, so we do want them to grow. We want them to pay for themselves, but we arenot going to predict kind of at what rate and you will kind of see as the quarters progress.


Okay. And just to clarify, you said that even when the written agreement is lifted, you don't expect to be able to buy back stock,return capital in 2012?


That is what I said.

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Okay, thank you.

Operator

Chris Brendler, Stifel Nicolaus.

Chris Brendler - Stifel Nicolaus - Analyst

Hi, thanks, good morning. Just a quick follow-up on the fee income line. The line on your other income that is fee and otherrevenue used to be somewhat disappointing. I just didn't know if you -- I know you made, I guess, some general commentsabout your ability to get fee income. Anything else you could say about the prospects for a rebound in that line and what isdriving some of the weakness there? Thanks.


Yes, I think a lot of that is, as I mentioned, that is really where the markdown on the operating leases that we have in held forsale goes through that line item. And so that is probably the main driver. Other than that, it has been fairly consistent over thelast couple quarters.


Yes, I don't think there is any real weakness from the business point of view.


No.


Okay. My second question would be, just in terms of the business -- in the past, you have given some rough metrics on whatkind of spreads you are generating on new business, particularly as it relates to the bank. And I just wanted to know some ofthe changes in the marketplace, if you have seen -- it sounds like, from a macro perspective, things seem to be pretty muchstable. There may be a little bit of an increase in competition, but your funding costs are obviously lower as you now originatemuch more of your production out of the bank. Just give an idea of where spreads are.

And then if we do double-dip, what do you think the outlook would be for asset growth? I get this question a lot. Do you think-- like I think that, on one hand, you are obviously macro-sensitive and loan demand would fall. But on the other hand, you'vemade such progress on the bank side that you may be able to, I think, still continue to find good lending opportunities givenhow much your cost of funding has dropped on a marginal basis.

Maybe just comment on how you think about asset growth going forward under sort of the current macro scenario of slowgrowth and one of double-dip.

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Chris, I will answer the first question and John will answer the second part of that. So on the first part, we haven't seen anychange; that is why I didn't repeat it this quarter. But the Corporate Finance loans and the Vendor assets going into the bankare kind of maintaining; the yields are not declining. So the yields are still kind of in the range that I put out there before.

And given the cost of funds, both those businesses are kind of getting to the finance margins we would expect in the long-termtargets that we have laid out. So it is just a matter -- as we have mentioned before, it is just a matter of kind of the transition. Itis still ramping up, so on a proportion of the assets we have between the parent company and the bank, we will continue toshow and talk about that in future quarters. But I will turn it over to John for the question on assets.


So in terms of the economy, as I said, we don't see a double-dip; we just see slow growth in the US. And we demonstrated andI think can continue to demonstrate that we can grow assets in an attractive way in a slow growth environment. If there was adouble-dip in the US, it would negatively impact loan demand. And so I think it would slow down our ability to generate newassets and it would also, I think, likely increase or at least it would slow down the improvement we are seeing in the creditportfolio of our existing book.

So if we got into a double-dip, I would expect both slower asset growth and some credit deterioration in the existing book. Ithink there is no way around the fact that we are sensitive to economic activity.


Okay, thanks very much.

Operator

Sameer Gokhale, KBW.

Sameer Gokhale - Keefe, Bruyette & Woods - Analyst

Hi, thanks for taking my question. I guess in terms of -- you talked a bit about the -- after you meet the terms of the writtenagreement, you might not be able to return capital and then you specifically I think said that while you could look at some ofyour businesses and try to lower costs and increase operational flexibility, perhaps tied to that, can you explain exactly whatyou mean by that? What kind of steps would you specifically envision being able to take after having met the terms of thewritten agreement that you can't take right now?


There are two commingled pieces, I think, Sameer. So one was what I mentioned was around the debt covenant. So as we paidoff the 2014s and had the consent and exchange offer, -- the only remaining covenant is kind of the cash sweep. So with that,it has allowed us to look at our subsidiaries and kind of work on the capitalization of each one of those, which will help us withrespect to both lowering costs in certain areas, improving our tax efficiency, as well as some of the flexibility around where wecan fund assets in different parts of the world.

The second piece on the written agreement, I will let John comment on what he said.

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Okay, I think part of the answer is we don't know for sure what form of memorandum of understanding would be written.Typically, there are -- typically they would require permission to buy back stock or pay dividends and so I would expect thatwould be the case. I think the place where we would hope to get more flexibility is just in our overall business mix and beingable to diversify out our business in an attractive ways.


Okay. That is helpful. The other question I had is, in terms of your asset sales, I think you had you said a little over $700 million.How many of those or what mix of those, that $700 million, consisted of loans on non-accrual because there was a decline inloans on non-accrual. I just wanted to get a sense for the contribution from asset sales.


I would say roughly probably 50% of the loans.


Okay. And then in your Trade Finance business, I think it looked like there was kind of an increase in loans on non-accrual there.Is that any sort of an indicator of the pressure that retailers are facing or I mean can you just give us a little bit more color onthat? Is it volume-related?


No, it is actually just one account and so it is not indicative of anything.


Okay. That's helpful. And then just the last question, the transfer of the Trade Finance business, I thought you might have saidthat you expected to get approval to transfer that into the bank by the end of this year. Is that still your expectation?


No, and I don't think we said that.


Maybe I was confusing that with the Vendor Finance, which you have already done. But do you have a sense for the TradeFinance and when you expect that to go into the bank?


That is a 2012 project.

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Okay. And you are continuing to make progress there? Are there any early indications that that is going to be very likely becauseyou were very confident about the Vendor Finance. Just trying to get a sense for where you stand on the Trade Finance.


I think I would just stay with what I said, which is that's a 2012 project.


Okay. Great, thank you.

Operator

Don Fandetti, Citigroup.

Don Fandetti - Citi - Analyst

Yes, John, I was wondering if you could talk a little bit about how discussions have gone with the rating agencies and if givenyour plans to pay down debt, if investment grade rating is even on the radar screen for '12 or is that more of a '13, '14 typetarget?


Well, first of all, I would never attempt to predict when the rating agencies will do things. I would say that I think it is likely wewill trade at investment-grade spreads before we get investment-grade ratings. Look, I think that we already are not rated wherewe should be if you look at our capital ratios, if you look at our earnings power, if you look at the fact that we have repaid orrefinanced $15 billion worth of debt. I think we are rated too low as it is, but I am not going to predict when they will actuallygive us investment-grade ratings and I think that we will get to a primarily uncollateralized borrowing structure and we willtrade at investment-grade spreads before we get investment-grade ratings.

Don Fandetti - Citi - Analyst

Thanks.

Operator

John Stilmar, SunTrust.

John Stilmar - SunTrust Robinson Humphrey - Analyst

Thank you. Good morning. Scott, I wanted to touch briefly on a comment you just made with regards to the internationalbusiness and where to fund assets in the world I think was the comment. I was wondering if that also ties into my other question,which is on the Vendor business. It seems -- can you talk a little bit more about the types of loans that you are making in theinternational Vendor business and is that really the same assets that tie back to your comment of where in the world to fundassets given that seems to be the platform for a lot of international growth or am I missing something?

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No, I think the platforms internationally we have for Vendor are in the same kind of industries that is the US business. So it ismainly office product, technology and telecom equipment. So it is just we are following, in some cases, some of our vendorpartners, as well as doing kind of local organic programs with relationships we have in each one of those regions.

And as we have said, especially in Brazil and China, we have funding from our Brazilian bank, as well as other sources there. Andwe have put in place a conduit with some of the large banks in China to fund our business in China. So I think we feel goodabout that and we also have a sizable kind of European platform that we are continuing to -- we have funding in place for mostof that business also. So it is the same type of equipment that we have, mainly the same type of equipment we have that wedo here in the US.


So is it the Vendor business that doesn't -- I guess what part of the business where the -- quote/unquote where in the worldthe assets can be financed. It seems like to me that the Vendor business internationally is relatively small today.You have gottenthe liquidity and funding in place. So the marginal benefit from international financing advancement would come from where?


I guess I don't totally understand the question.We are growing those assets outside the US.We are funding them to the extentwe can locally and I think that is just a source of growth for us.You look at where the GDP in the world is growing faster, it is inplaces like Brazil, places like China and that drives faster asset growth on our side.


Perfect. So it's the portfolio mix. Thank you for the clarity. And then with regards to -- can you characterize, one, cash flow andABL type investments and compare and contrast the types of partners or people that are in the same kinds of facilities? Ormaybe a better way of asking the question is what your competition is? Is it different for the different types of asset classes andif so, could you kind of characterize what those are? And thank you.


Specifically on the Corporate Finance side?


Yes, for the cash flow versus ABL or is it banks and the ABL type stuff that you are either partnering with or competing against?And then is it insurance companies, BDCs, other types of vehicles and the cash flow, is that really what the competition is todayand is that reflective of some of the comments you had with regards to pricing and trend?


I would say, yes, there is definitely more competition in the ABL because you have both regional banks, as well as the nationalkind of banks that are playing in there, plus GE Capital and others that play in that arena. So on the cash flow, it tends to be asmaller group of competitors. And that one I think the competition and the number of players in there is much less and the

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expertise and underwriting capabilities for cash flow are something that really is built on both the customer relationship, butalso structuring capability. And so I would say that is one of the reasons for the pricing dynamics around there.


Thank you, guys.

Operator

Mike Turner, Compass Point.

Mike Turner - Compass Point - Analyst

Hi, good morning. You have really touched on this earlier, but what was kind of the average gross origination yield if you lookacross the $1.9 billion in funded originations in the quarter?


It is kind of hard to answer that in the sense of the different business lines we have. So I mean trade wouldn't be in the growth,but you have got Transportation assets, which is really kind of a lease rate and railcar versus Corporate Finance and Vendor. Sothe blended number I think -- maybe I can circle back with Ken and the IR team. I don't have the specific number off -- but it isnorth of 6% on average.


Okay, thank you. That's helpful, thank you. And then also you've kind of mentioned in the past about looking at potentialportfolio purchases now that you have got the Internet deposit strategy rolled out. Could you talk about that environment? Imean assuming spreads have widened, I would assume pricing might be more attractive. I don't know what the environmentis like and if there is as many willing sellers out there.


The answer is there are quite a number of portfolios for sale and we believe that there will be pretty interesting and attractiveopportunities for us to purchase portfolios.


Okay.Would you consider other lines that you are not in or really just kind of add-ons to existing businesses?


No, I think it is much more likely we would stick to the businesses that we know. I don't think we would buy a portfolio in abusiness that we didn't have an expertise in.

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Okay, thanks. And then last, the increase in the comp expense in the quarter, was that -- I know you said you added a new CREteam. I mean is that kind of a one-time or is that a trend maybe that might develop?


I don't think it is related to kind of the one team that we brought on.


Although, they wish it was.


So I think, again, looking at the trends, it was a little bit higher based on a couple of items in regards to kind of the mix of someof the people we did bring on. Our headcount was flat, but there are differences in the compensation for some of the folks webrought in in the quarter. Also some is varied based on volume being up on the sales side. You would have a little bit of acompensation increase there. So I wouldn't say 135 is a trend nor is 120, but as we have talked about, we're looking and focusingon total expenses.


Okay, great.Thank you.

Operator

Mike Taiano, Sandler O'Neill.


Hey, guys. I just had a follow-up on the acquisition question. Given the fact that you are probably not likely to return capital toshareholders in 2012, does that just make you more inclined to look at acquisitions to better utilize the excess capital? Doesthat factor into the decision? And then also given you still have that 7% debt out there, does that weigh pretty heavily in howyou kind of view acquisitions as well?


Well, I think the debt and portfolio acquisitions are really two different things. We absolutely want to retire the $6.5 billion ofSeries A debt kind of as quickly as we can.That will be determined more by cash flow generation, as well as our ability to accessthe capital markets. But the goal is to pay that $6.5 billion back as quickly as we can so we can become unsecured.

That is really a separate issue from portfolio acquisitions because we do have substantial excess capital. We would only buythings that offered us attractive returns and attractive returns to our shareholders and was attractive vis-a-vis our own originationcapability. So there is no particular pressure to push to buy portfolios, but I actually think, in this environment, there are quitea number of motivated sellers and so I think we may have some pretty attractive opportunities to buy things.

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Great, thanks a lot.

Operator

Ladies and gentlemen, that does conclude today's Q&A portion. I would now like to turn the call back over to management forany closing remarks.

Ken Brause - CIT Group Inc. - EVP, IR

Well, we thank you all for joining us this morning and for all your questions. If you have anything we didn't answer, please feelfree to contact me or any member of the Investor Relations team.Thanks and we will talk to you again next quarter.

Operator

That concludes today's call.Thank you for participating.

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Q3 2011 CIT Group Inc Earnings Conference Call on Oct. 25. …€¦ · Oct. 25. 2011 / 12:00PM, CIT...

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