CIT Group Inc (NYSE: CIT) is a bank holding company that offers a range of products and services from lending, leasing, and advisory services to middle-market companies in the energy, health care, communications, retailing and entertainment industries. CIT generates revenue by earning interest income on the loans it provides, collecting rental income on the equipment it leases, and earning fees on the financial services it provides. In 2010, CIT earned a $644 million in net interest revenues and had a net income of $517 million.
During the tumultuous period that began with the Financial Crisis, CIT faced issues with regards to its funding. As a result, CIT converted into a bank holding company, enabling it to receive the benefits of being a Federal Reserve member. However, they were unable to realize some of the benefits they had hoped for, and CIT filed for Chapter 11 bankruptcy in order to restructure its debts. CIT emerged from bankruptcy just one month later. While in bankruptcy, CIT was able to reduce its total debt by $10.4 billion, and repayments of the principal amount on loans do not begin until 2013, reducing CIT's short term funding issues. CIT also sold $2.3 billion in preferred stock and warrants to the U.S. Treasury as part of its Troubled Assets Relief Program (TARP).
Headquartered in New York City, CIT provides financing and leasing to clients in over 30 industries and 50 countries. Despite being a global commercial and consumer finance company, the company focuses on small businesses and the middle market, CIT provided $7.0 billion of funding for small businesses, and considers itself one of the leaders in small business lending.
During 2010, CIT was able to turn from a net loss of $4 million in 2009 to a net income of $517 million in 2010.
CIT breaks its business into five business segments: i) Corporate Finance, ii) Transportation Finance, iii) Trade Finance, iv) Vendor Finance, and v) Consumer Finance.
The Corporate Finance segment provides a wide variety of financing to small and middle market businesses across a number of industries, including energy, communication, health care, entertainment, and commercial and industrial businesses. They also have a subsegment designated on doing Small Business Administration (SBA) and conventional loans for small businesses.
The Transportation Finance segment specializes in leasing and financing to the end-users of aircraft and rail cars. These would include airlines and railroad companies. This segment is broken down into two groups: Aerospace, and Rail, The aerospace group had approximately 300 aircraft and a $7.0 billion portfolio, while the rail group had over 103,000 rail cars and approximately 460 locomotives in its portfolio.
Trade Finance provides factoring, receivable and collection management products, and secured financing for CIT clients. Clients use this segment's products and services to improve cash flow, reduce credit risk, increase sales, and improve management information. CIT clients can also outsource their bookkeeping, collection, and other receivable processing. In summary, the Trade Finance segment provides innovative financing and leasing solutions to manufacturers, distributors, and customer end-users around the globe.
CIT's Vendor Finance segment works with manufactures and distributors to provide financing to the clients' end users while also giving the client asset management services. These services allow the client to focus on its core business while CIT focuses on the financing.
This segment includes CIT's student loan portfolio, which is currently in runoff. CIT has providing any type of student loan.
CIT relies on access to the capital markets to provide sources of liquidity and to fund asset growth. These markets have exhibited heightened volatility and reduced liquidity. Recently, liquidity in the capital markets has been more constrained and interest rates available have increased significantly relative to benchmark rates. As a result, the cost of funds has increased and they have shifted funding sources primarily to asset-backed securities and other secured credit facilities, rather than unsecured debt securities. Adverse changes in the economy, long-term disruption in the capital markets, deterioration in business performance or downgrades in credit ratings could limit their access to these markets or increase their cost of capital.
A recession or downturn in the U.S. or global economies or affecting specific industries, geographic locations and/or products could make it difficult for CIT to originate new business, given the resultant reduced demand for consumer or commercial credit. In addition, a downturn in certain industries may result in a reduced demand for the products that they finance in that industry or negatively impact collection and asset recovery efforts. For instance, CIT ordered $3.15 billion worth of aircraft from Boeing Company (BA). If the transportation industry begins to perform poorly, then this investment in planes may hurt CIT's earnings going forward.
Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect both the ability to originate new finance receivables. Since this makes it more difficult for CIT to make loans, it would hurt the profitability of CIT. Conversely, a decrease in interest rates could result in accelerated prepayments of owned and managed finance receivables. If the loans CIT provides do not have a prepayment penalty, this too may hurt CIT's earnings as the new loans it originates after prepayments would be at a lower interest rate.
CIT's market is highly competitive, as there are countless banks and other lending organizations willing to extend credit to small businesses. These competitors include General Electric Capital (GEC), Citigroup (C), J P Morgan Chase (JPM), and Bank of America (BAC), among other banks, insurance companies, and mortgage companies. These competitors generally compete on the basis of financing terms, structure of the deal, and services provided.