Banking & Finance

CIT's $3.4 Billion Buyout Makes It Systemically Important to Regulators

CIT Group Inc. (NYSE: CIT) may have delivered on beating its earnings expectations, but this is just a tiny fraction of the story here. CIT’s acquisition of the parent company of OneWest Bank NA for some $3.4 billion in cash and stock is a game changing acquisition that makes CIT a much larger company to follow. In fact, CIT is now going to be back in the systemically important financial institution (SIFI) category. We will not get into the debate of whether this makes CIT go into the ‘too big to fail’ camp, but some will.

CIT had $44.1 billion in assets as of the end of the June 30 quarter. That was shy of the $50 billion threshold for the systemically important regulatory line. It is not the purchase price of $3.4 billion for the IMB Holdco parent of OneWest that investors need to consider here. It is the size of the assets under consideration.

Now consider that CIT had to undergo bankruptcy protection back in 2009 after the recession wiped out so many financial firms. With this acquisition, CIT picks up another 73 retail branch operations in California. CIT will also now have $28 billion in direct deposits as well after the combination.

What investors will want to consider here is that this combination puts CIT’s assets up at about $67 billion. This would not be worth crossing that $50 billion line had it just been a marginal move above. A marginal increase above the $50 billion line would not be enough to justify the additional regulatory costs and regulatory procedures that come with being classified as systemically important.

Another boost to CIT is that this marks the largest banking deal of 2014. CIT CEO John Thain has gone on to say that CIT has the systems in place to address the SIFI concerns of regulators and also to police the anti money laundering regulations. Another positive for regulators is that this gives CIT more retail deposits that would count it more as a real bank rather than just being considered a small and mid-sized business lender by most of the investment community.

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OneWest may be unknown to many market watchers, but it has many assets of the former IndyMac Bank that collapsed going into the recession. John Thain expects the deal to close in the first or second quarter of 2015 – and ultimately by 2016 he expects it to add 20% to the overall CIT earnings per share targets.

With Thain delivering on a serious earnings beat and making CIT systemically important again, investors had driven CIT shares up over 10% to $48.71 on close to five-times normal trading volume with more than an hour to go in normal trading on Tuesday. CIT’s 52-week range is $41.06 to $52.72 and the pre-earnings consensus analyst price target was $50.91.

This looks like a serious win for CIT shareholders. Our guess is that this means that you will be hearing a lot more about CIT group on the investor front.

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