Now that CIT Group has found a buyer for its commercial air business, the company faces a new challenge: finding ways to boost profitability while shedding assets.
The $66 billion-asset CIT announced the long-anticipated sale of the aircraft leasing unit last week, in a $10 billion agreement with Avolon Holdings, a division of HNA Group in China.
The deal marks a significant step forward in CIT's ongoing effort to transform itself into a leaner, commercial bank.
CIT, based in Livingston, N.J., was best known as a commercial finance company until it acquired OneWest Bank in Pasadena, Calif., last year, and Chief Executive Ellen Alemany said its focus going forward will be gathering more retail deposits and increasing its lending to middle-market companies.
The aircraft sale will shrink CIT's assets to just over $50 billion, leaving the company without much scale to handle the costs of being a systemically important financial institution. Some analysts have been urging CIT to unload more assets so it can shed its SIFI designation, but Alemany, who replaced John Thain as CEO earlier this year, said she has no plans to manage the company around a specific asset size.
"If you say you're going to be under $50 billion, then you say you're not growing," she said in an interview Friday.
Federal Reserve Board Gov. Daniel Tarullo has suggested easing stress-test requirements for regional banks, and that could certainly reduce pressure on CIT to further shed assets. Still, Alemany faces some challenges in trying to improve CIT's profits, the most notable being resolving accounting issues at the reverse mortgage servicing unit it inherited from OneWest.
CIT's second-quarter earnings fell nearly 90% from the same period last year, to $14 million, after the company reported a $167 million loss at the discontinued servicing arm. The company disclosed earlier this year that the Department of Housing and Urban Development was investigating the accounting issues.
CIT reported an adjusted return on tangible common equity of 8.26% in the second quarter and Alemany's stated goal is to boost that figure to 10% by 2018.
Under the agreement announced Thursday, Avolon will buy the roughly $11 billion-asset aircraft leasing business at a 6.7% premium. The transaction is expected to close in the first quarter of 2017.
Avolon has also deposited $500 million in an escrow account, "to reflect its commitment to the transaction." CIT will receive the deposit — as well as an extra $100 million deposit — if the deal is completed.
CIT has already announced plans to divest operations in Canada and China and the sale of the aircraft leasing business would accelerate its transition to a more traditional bank, analysts said.
"We believe that the sale provides a clearer path towards its goal of transitioning to become a leading national middle market bank and improving its profitability," Arren Cyganovich, an analyst with D.A. Davidson, said in an Oct. 7 note to clients.
CIT has also faced pressure to sell its railcar business, but Alemany said the company has no current plans to do so.