War for online deposits eats into CIT Group's 4Q profit

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The fourth-quarter earnings report from CIT Group highlighted the challenges online banks face when competing for consumer deposits.

As part of a strategy to remake the $49 billion-asset CIT Group as a more consumer-focused bank, Chairwoman and CEO Ellen Alemany has unloaded noncore businesses and promoted CIT’s online bank. CIT pays some of the highest rates among digital banks and that's a big reason deposits rose 6% to $31.2 billion in the fourth quarter when compared with the same period a year earlier.

But compared with the third quarter, average deposits dropped 1% to $30.9 billion, partly due to lower balances from digital accounts.

Ken Zerbe, an analyst at Morgan Stanley, asked CIT executives during a Tuesday conference call why deposit growth stalled during the quarter when the bank's savings rates "are very competitive" with those of other online banks.

John Fawcett, CIT's chief financial officer, explained that competition for online deposits noticeably picked up after the Federal Reserve raised rates in September. CIT Group’s rates fell behind those of other banks, he said.

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“We experimented a little bit with rates,” Fawcett said. “We tried to move from 1.85% to 2.15%" for savings accounts, and "quickly moved on to 2.25%, where we were met with competition from about eight other online banks.”

The cost of raising rates ate into CIT's profits. Net income in the fourth quarter was $82 million or 78 cents per share, 11 cents lower than the mean estimate of analysts compiled by FactSet Research Systems. Total interest expenses rose 28% to $215.5 million.

Net finance revenue dropped 6% to $44.1 billion, both as a result of higher deposit costs and from lower rental income from operating leases.

Noninterest income, excluding several one-time items, fell 15% to $92 million on lower capital markets fees and a decline in gains from a reverse mortgage portfolio.

Noninterest expense fell 15% to $258 million as CIT spent less on employee benefits and salaries, and professional fees.

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Earnings Deposits Consumer banking Digital banking Ellen Alemany CIT Group