Starting from Behind: Can Ellen Alemany Fix CIT?

Ellen Alemany's to-do list at CIT Group keeps getting longer.

When Alemany becomes the $67 billion-asset company's chief executive next week, she will inherit a financial firm that is struggling to find its footing as a regional bank. Recent months have been a slog for CIT in its dual quest to catapult over $50 billion in assets and transform itself into a formidable industry player.

CIT, and current CEO John Thain, had run into several obstacles. Its OneWest deal was marred by accounting snafus and culture clashes, and costs tied to restructuring, regulatory compliance and credit risk management are weighing it down. And investors, upset about dwindling returns, have begun pushing the company to downsize even more.

Getting CIT back on track could be a legacy-defining assignment for Alemany, in much the same way as the firm's turnaround after bankruptcy was viewed as a chance at redemption for Thain. Based on the tone of a conference call Thursday, Alemany's success will hinge on the outcome of several battles in coming months.

Alemany, for her part, is ready to go.

"I raised my hand for the role," she said in an interview after the conference call. "The whole strategy here is focusing on our core businesses."

Alemany used the call to outline a series of initiatives planned for the next year that should boost long-term returns. CIT, already in the midst of a cost-cutting effort, plans to slash expenses by an additional 10%, or $125 million. CIT will also unload its aircraft unit – either by sale or spinoff – by yearend.

Those efforts will only go so far when it comes to boosting profit. Expenses, which weighed down fourth-quarter results, will likely rise this year due to energy-related provisioning and large-scale restructuring. Once it sheds the aircraft unit, CIT will also be in the precarious position of falling below $60 billion in assets, which could make it harder to tackle the costs associated with being a systemically important financial institution.

"It is not an optimal place to be in," Alemany said during the interview. "It's a really complicated issue."

That is an understatement in the eyes of some analysts.

"The next couple of quarters are going to be challenging," said Brian Klock, an analyst with KBW who follows the company. "And the conditions are challenging, with low interest rates with oil and gas being an issue."

Still, the call marked a comeback of sorts for Alemany, a former CEO at the $108 billion-asset Citizens Financial who came out of retirement late last year to join the Livington, N.J., company. She led Citizens for six years, stepping down in late 2013, a year before Royal Bank of Scotland spun off the company. Before that, she held various senior-level roles at Citigroup.

For CIT, the management shakeup represents another chapter in the specialty finance firm's long and checkered history.

The prior chapter began in 2010, when Thain joined shortly after CIT emerged from bankruptcy. CIT gave the former Merrill Lynch CEO a platform to reinvent himself. In exchange, he returned the company to profitability while navigating its release from various regulatory orders. Thain also completed a series of deals, including OneWest, to jump over $50 billion in assets and prepare for future growth.

"It's better to be $70 billion than $52 billion," Thain said in an interview last year.

Jumping over that regulatory threshold has proven difficult for CIT, as it struggles to realize the benefits of its newfound heft. Shareholder returns have been squeezed, and its pretax return on earning assets fell to 0.95% in the fourth quarter, compared to 2.12% a year earlier.

CIT's stock is down nearly 25% over the last 12 months, outpacing broader market declines.

No additional bank M&A deals look to be in its near future, given the weak stock price and the pressure to boost returns sooner rather than later, Klock said.

Indeed, in a strategic reversal, CIT has started to shrink, selling assets in an effort to boost returns. Last fall, the company announced the sale of its aircraft unit, which manages a fleet of more than 350 planes.

The company is also in the process of selling units in China and Canada. It also plans to divest OneWest's Financial Freedom reverse-mortgage servicing business, where accounting issues forced CIT to delay filing its annual report earlier this month.

CIT, however, has faced pressure to keep downsizing.

Hudson Executive Capital – a hedge fund associated with former Wells Fargo CEO Richard Kovacevich, among other big names – recently bought a 0.5% stake in CIT and has reportedly been urging management to sell the rail unit.

Shedding the aircraft and railcar units would push CIT below $50 billion in assets, said Vincent Caintec, an analyst at Macquarie Research.

Alemany said during the call that there are no current plans to sell the rail business, citing various accounting benefits that it provides. Still, CIT will keep exploring "alternatives" to reduce its concentration in railcar-related assets, she said.

Railcar-related assets will account for 15% of CIT's total assets, after the aircraft divestiture is completed. The railcar business, while profitable, faces challenges, given a decline in the steel, energy and other commodities-driven businesses.

Alemany wished Thain well in his retirement, though she declined to say whether she received any parting advice from her predecessor. She did, however, make it clear that her focus is on boosting profitability, rather than revenue growth

"What we're doing today is really putting in place a strategy for the company, post the OneWest transaction," Alemany said during the interview. "I think we have a tremendous opportunity."