By Andrew R. Johnson
John Thain's bid to rebuild CIT Group Inc. suffered a setback
Tuesday when the business lender reported a surprise 33% drop in
net income, missing analysts' estimates for the third time in five
quarters.
Mr. Thain, 58 years old, joined CIT as chairman and chief
executive after the bank emerged from Chapter 11 bankruptcy, still
bogged down with high-cost debt. His task: cut its debt burden,
boost its deposits and slim its international operations.
While he has made progress on a number of fronts, the bank
remains in flux, leaving investors unsure of its profit potential.
CIT's first-quarter net income of 55 cents a share was 32 cents
less than analysts surveyed by Thomson Reuters had projected.
The lender was squeezed in two ways. CIT continued to shrink its
international operations, which boosted expenses. At the same time,
the sale of a portfolio of student loans weighed on fee income.
The moves weren't a surprise, but analysts had trouble
forecasting their effect on CIT's results. While they are
encouraged by the progress Mr. Thain is making in turning the
company around, some analysts are growing frustrated with CIT's
unpredictability.
"People are wondering what the real earnings power of the
company is," said Sameer Gokhale, an analyst with Janney Montgomery
Scott LLC. A company spokesman declined to comment.
CIT's stock closed down $2.65, or 5.7%, at $43.61 in 4 p.m. New
York Stock Exchange composite trading, its biggest drop in a single
trading session since 2012.
Mr. Thain, a native of Antioch, Ill., rose through the ranks at
Goldman Sachs Group Inc. to become president and chief operating
officer before leaving in 2003 to run the New York Stock Exchange.
The storied exchange was reeling from a controversy over the pay of
its former CEO, Richard Grasso. Mr. Thain took a much smaller pay
package in a bid to restore confidence. He brought the company
public in 2006 and helped engineer a merger with Euronext NV in
2007 while speeding its shift to electronic trading.
Mr. Thain's next assignment came in late 2007, when he was
tapped to resuscitate Merrill Lynch & Co., which was suffering
steep losses due to soured mortgage securities. In the frenzied
weekend before Lehman Brothers Holdings Inc. collapsed in September
2008, Mr. Thain negotiated a sale to Bank of America Corp. The deal
saved Merrill but helped fuel debate over too-big-to-fail financial
institutions that intensified after it was revealed the firm's
losses had escalated before Bank of America closed the deal.
Mr. Thain's personal reputation suffered further following
revelations about expensive office renovations. He later reimbursed
Merrill for the costs.
At CIT, Mr. Thain has sought to repair that reputation, as well
as the company's balance sheet.
CIT makes loans to small and midsize companies for mergers and
acquisitions, office equipment, general working capital and other
purposes. It also operates a large transportation-finance business
that leases airplanes and railcars.
The Livingston, N.J., company was another casualty of the
financial crisis. Businesses in 2008 rushed to draw on their credit
lines, and CIT was unable to raise new money in the debt markets to
fund loans.
CIT filed for Chapter 11 bankruptcy protection in November 2009
and emerged the following month. The bankruptcy wiped out a $2.3
billion bailout it received from the U.S. government through the
Troubled Asset Relief Program.
Mr. Thain has focused on refinancing CIT's huge debt load and
increasing its base of deposits to fund loans to businesses more
cheaply. In 2011, CIT launched an online bank that offers savings
accounts, certificates of deposit and other products. Deposits in
CIT Bank increased to $13.1 billion in the quarter, from $10.6
billion a year earlier, and now represent more than 40% of CIT's
funding.
CIT reached a key milestone last year when the Federal Reserve
Bank of New York lifted limits it placed on the lender following
the financial crisis that required it to beef up its
risk-management and corporate-governance efforts and curbed its
ability to return capital to shareholders. CIT last year stoked
investor confidence by announcing plans to repurchase shares for
the first time since 2007 and pay a dividend for the first time
since 2009.
The moves, combined with relatively stable loan growth and
speculation CIT might be on the shopping block, helped drive the
company's shares up more than 32% in 2013, to $52.13, near an
all-time high.
But CIT's shares have slumped this year on concerns about the
company's ability to boost earnings in the face of continuing
restructuring activities, softer loan demand and increased
competition.
The poor first-quarter results only exacerbated the slide. CIT's
shares are down 16% this year.
CIT's net income fell to $109.1 million, or 55 cents a share,
from $162.6 million, or 81 cents a share, in the period a year
ago.
Mr. Thain during a Tuesday call with analysts acknowledged that
"this is a disappointing quarter from an earnings point of
view."
While analysts are encouraged by the progress Mr. Thain is
making in turning the company around, some of them are growing
frustrated with CIT's unpredictability.
"Strategically, they're executing on" their long-term goals,
"but it's not translating currently into an improving earnings
outlook," said Eric Wasserstrom, an analyst with SunTrust Robinson
Humphrey. The "fundamental quandary for shareholders isn't likely
to be resolved in the next few quarters."
Chris Brendler, an analyst with Stifel, Nicolaus & Co., said
the recent results were disappointing given the progress made under
Mr. Thain's leadership previously.
"I think Thain has done about as good of a job as you'd expect,
given the hand he was dealt," Mr. Brendler said. "He's made a
number of smart moves in righting the ship. Unfortunately, today
that's still happening."
Write to Andrew R. Johnson at andrewr.johnson@wsj.com
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