DBRS Downgrades CIT Group Inc. to BBB (high), Under Review Negative

DBRS has today downgraded the ratings of CIT Group Inc. and its related subsidiaries (CIT or the Company); including its Issuer and Long-Term Debt ratings to BBB (high) from A (low). Concurrently, the preferred share rating was downgraded to B (high) from BB (high). The Company’s Commercial Paper ratings remain at R-2 (high). In addition, all ratings of CIT were placed Under Review with Negative Implications.

Today’s rating action follows CIT’s earnings release for the first quarter of 2009 and reflects DBRS’ opinion that the Company’s financial profile will continue to be pressured by reduced market liquidity, higher funding costs, and elevated credit costs. Moreover, today’s rating action reflects DBRS’s perspective that the Company’s earnings generation ability has been reduced. Meanwhile, the Company will likely need to curtail origination volumes to reflect its current funding profile, the reduced investor appetite in the loan syndication market, and the overall stressed market conditions; thereby DBRS expects that revenues will be constrained. DBRS is concerned that the expectation of lower revenues comes at a time when solid revenues are required to absorb the elevated credit costs associated with this difficult credit cycle.

CIT’s earnings release reported that the Company incurred a loss of $438.1 million from continuing operations for the first quarter of 2009. This result reflects the impact of the continuing deterioration in the U.S. economy since year end, which drove credit costs higher. Provisioning for credit losses were $535.4 million for the quarter, an increase of 21.7% from a quarter ago. Moreover, CIT’s reliance on more expensive secured funding continues to pressure interest margins, which is illustrated by a loss of $17.5 million in net interest revenue. Despite the decline in rates, CIT’s cost of funding has not fallen as much as the yield on its loans. Leasing revenues however, held up at $475.2 million for the quarter. Additionally, CIT’s quarterly results include a one-time gain of $139 million on the repurchase of the Company’s unsecured debt at a discount.

Net charge-offs as a percentage of average finance receivables increased significantly to 2.41%, from 1.32% at year end 2008, reflecting the impact of the deepening U.S. recession on small and middle market companies. The increase in NCO’s was driven by higher loss severity and defaults concentrated in the Corporate Finance portfolio. The Company continued to build reserves, now at $1.3 billion up from $1.1 billion at December 31, 2008. Reserves as a percentage of finance receivables increased to 2.59% at March 31, 2008 from 2.06% at year end. DBRS considers the increase in loan loss reserves as prudent given the outlook for a prolonged recession in the U.S., which is pressuring the ability of CIT’s core market of middle market companies to service their debt.

DBRS considers CIT’s liquidity and funding profile as constrained. While DBRS recognizes the liquidity benefits CIT has received from the approval of its initial 23A waiver request and the possible benefits to the Company of any potential approval to participate in the FDIC’s – Temporary Liquidity Guarantee Program (TLGP), DBRS believes that other funding options will continue to be limited, more costly, and more often, secured in nature. CIT transferred $5.7 billion of government-guaranteed student loans and $3.5 billion of related debt to CIT Bank as part of its initial 23A waiver, creating approximately $1.5 billion of liquidity at the bank holding company. DBRS views the ability to transfer assets to CIT Bank as a positive for the Company’s overall liquidity position as it allows the Company to fund assets with lower cost deposits at CIT Bank. Deposits at CIT Bank totalled $3.0 billion at quarter end up from $2.6 billion at December 31, 2008. DBRS considers CIT’s remaining 2009 redemption schedule, which includes long-term debt maturities of $4.7 billion, as manageable.

DBRS views CIT’s capital base as acceptable. The Company’s first quarter estimated consolidated Tier 1 and total capital ratios were 9.3% and 13.0%, respectively, essentially flat from year end 2008. CIT’s tangible common equity-to-tangible assets ratio declined to 5.2% from 5.6% at December 31, 2008, driven by the net loss for the quarter.

DBRS’s review will include an assessment of CIT’s progress in managing its funding needs. DBRS will monitor CIT’s progress in obtaining additional sources of funding; including TLGP, its progress in attracting new deposits, and will monitor any other alternative actions the Company may take to bolster its liquidity profile. DBRS’s review will also focus on CIT’s ability to protect its strong business franchise. DBRS recognizes the steps management has taken to secure funding and protect its franchise over the past year. Yet, the ongoing disruption in the capital markets, the overall reduced market liquidity and the negative economic backdrop is weighting heavily on CIT’s strong franchise, which is a key factor underpinning the rating. While DBRS has a level of tolerance for reduced earnings and elevated credit costs given the current phase of the economic cycle, elevated losses from continuing operations indicating that the Company’s earnings generation ability and franchise have been permanently weakened could lead to further negative ratings pressure. Alternatively, ratings stabilization may be achieved with evidence that CIT’s liquidity and funding profile have been solidified. Moreover, DBRS would view positively any indication from CIT’s near-term financial performance that demonstrates that the Company’s earnings generation ability and franchise remains sound.

Additionally, DBRS today has corrected the Commercial Paper ratings of CIT Canada Funding ULC. The correction to this rating corresponds with the downgrade of CIT’s Commercial Paper rating to R-2 (high) from R-1 (low) on October 7, 2008.

Notes:

All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is Corporate (Financial Institutions) rating.