Now that it has emerged from bankruptcy, CIT Group has learned firsthand the same lesson other nonbank lenders have: the key to survival is to be more like a bank.
A central part of the $69 billion-asset CIT's new business plan is adopting a "bank-centric" funding strategy. The New York commercial finance company wants to move some of its core businesses — factoring, vendor financing and small-business lending — into its $9.4 billion-asset Utah bank.
"They got themselves overextended, caught in a liquidity trap," said Terry Keating, a managing director in the Chicago office of Amherst Partners, an investment bank. But CIT's "core lending business is well respected, and most [of it] does fit fairly well in a bank model."
Traditionally, CIT got most of its funding in the capital markets. This allowed it to do riskier and more profitable types of lending than banks, albeit at a higher cost of funds. After the crisis cut off its access to the markets, however, CIT struggled to restructure its debts, eventually going to bankruptcy court in the fall.
What's not clear now is whether and how CIT will gather enough deposits to finance its core businesses. The company also needs regulatory approval for the plan.
CIT would not comment for this story. In an investor presentation this month, CIT said it would try to gather deposits from its commercial lending customers. CIT has also said that it could build deposits through "potential strategic acquisitions."
Henry Coffey, a specialty finance analyst at Sterne Agee & Leach in Birmingham, Ala., said CIT's borrowers, by nature, do not have a lot of money to park. "They're lending to companies with cash-flow needs, so there is no natural connection between customers and deposits."
CIT also carries some baggage, since the Treasury Department invested $2.3 billion in the company through the Troubled Asset Relief Program in December 2008. That investment was wiped out in the bankruptcy. CIT formally emerged from bankruptcy on Dec. 10.
"We wouldn't assume regulators will be eager to allow CIT to carry out its dreams … so soon after the humiliation of a multibillion Tarp loss," Kathleen Shanley, an analyst at the bond research firm Gimme Credit, wrote in a note to clients last week.
Keating said "it's a little bit of a toss up" as to whether regulators will allow CIT to carry out its plan.
Though the rhetoric about the impact of CIT's demise on small and midsize businesses is a little overstated, he said, "the business environment doesn't need any more shocks" from a major lender being dissolved. "That leans toward greater regulator tolerance."
CIT Bank, in Salt Lake City, is not your typical state-chartered bank. For one thing, it has little exposure to real estate, commercial or residential. Three-quarters of its assets are loans made to consumers who buy things from CIT's customers. (The rest is commercial and industrial loans.)
Under the plan, the bank would handle all future originations for the operations that are being transferred. CIT's "legacy" portfolios would remain at the nonbank subsidiaries. In other words, CIT Bank would not have to fund an additional $50 billion of assets overnight.
Keating said making asset-based loans through CIT Bank will less profitable because of the higher capital reserve requirements and tighter lending restrictions.
He was also skeptical about CIT's prospects for acquiring a bank anytime soon. It would be difficult for a company fresh out of bankruptcy to get the green light from regulators to take over an institution, even a failed one, Keating said.
CIT Bank's deposits more than doubled from the end of last year, to $5.4 billion at June 30, although they slipped to $5.2 billion at Sept. 30.
The bank appears to have priced aggressively to attract the additional deposits. Its cost of funding earning assets, a proxy for deposit rates, was 3% in the third quarter, compared with an average of 1.75% for commercial banks of similar size, according to Federal Deposit Insurance Corp. data. It's unlikely regulators would sanction much more growth in brokered deposits, which are considered "hot money" subject to quick withdrawal.
In the past year, other nonbanks, like American Express Co., Discover Financial Services and GMAC, have built deposits through direct channels like the Internet. But even this strategy has its limitations.
This year the FDIC told GMAC's fast-growing Ally Bank to rein in its pricing.
Christopher Whalen, a co-founder of Institutional Risk Analytics, a Los Angeles unit of Lord, Whalen, said CIT will need to demonstrate to regulators that it is a "viable bank holding company," which would mean assembling a strong management team and perhaps an equity infusion. "They'd have to get a lot more money in the organization, some private-equity fund would have to come in and supercapitalize them."