CIT Shares' Road to Nowhere
One of the most famous survivors of the financial crisis is retiring this month after his third stint as a "turnaround CEO."
What's debatable is whether John Thain's last project, CIT Group, has been successfully turned around. The company's shares peaked more than two years ago and last month traded at their lowest price since the company emerged from bankruptcy protection in 2009. They've rebounded 20 percent since then, but they still remain more than 40 percent below the 2014 high and trade pretty close to where they were when he took over six years ago.
Taking the reins at CIT in 2010 allowed Thain the opportunity to turn around not only a company fresh out of bankruptcy protection but also his own reputation, which was damaged in 2009 amid, among other things, criticism over a $1.2 million redecorating of his office at Merrill Lynch as the firm was hobbled by subprime-tainted bonds. He was ousted from Bank of America less than a month after it took over Merrill, sparing it from collapse. (Before Merrill, Thain had been CEO of the New York Stock Exchange, winning praise for dragging the Big Board into the modern age by taking it public and focusing on electronic trading.)
CIT has staked its future on transitioning to a regional bank through last year's $3.4 billion purchase of IMB Holdco, the parent of OneWest Bank. That was the type of deal that turnaround CEOs dream about. OneWest was assembled from the ruins of the financial crisis after a team of investors including George Soros, John Paulson and Michael Dell bought failed mortgage lender IndyMac Bancorp from the Federal Deposit Insurance Corp., a deal that included many loans protected by loss-share agreements with the government.
The takeover by CIT turned out to be somewhat difficult to close -- it took a year -- largely because of regulatory scrutiny amid fierce protests by advocates for low-income borrowers upset with OneWest's lending and foreclosure practices. Critics are still raging against the deal on a website called -- what else -- badbankmerger.com.
On Tuesday, a new issue with the deal emerged. CIT said the company needed to delay its annual report with the Securities and Exchange Commission because of material weakness in accounting practices in the Financial Freedom reverse-mortgage business that came with the acquisition. Reverse mortgages weren't a huge part of the business, with the portfolio's fair value reported as $811 million when it was acquired, and the filing said its last two earnings reports were not materially misstated. In fact CIT shares rallied after the filing, though that was likely a result of risk-on fever sweeping the markets on Tuesday.
Still, "material weakness" in accounting is never good. And in this case it's just one more reason for scrutiny of the takeover that pushed CIT into the realm of systemically important financial institutions with more than $50 billion in assets. The main concern is that it's not adding as much to earnings as had been hoped, and the average analyst earnings estimate for this year has fallen by almost $1 a share.
"Many investors in CIT shares had expected the OneWest deal would be transformational for the company and that it would result in a significantly higher share price," BTIG analyst Mark Palmer wrote in a note to clients last month. "We think Thain's decision to retire reflects the absence of additional initiatives to further 'fix' CIT or otherwise reposition it for upside."
Thain has said otherwise in media interviews after the announcement of his retirement, saying that he's stepping down because he has accomplished the tasks for which he was hired, including resolving regulatory problems and improving the balance sheet, and that he wants to spend more time with family while he ponders his next move.
"It has been one of our strategic goals to attain investment-grade ratings, and I'm very pleased to say we've gotten there," he said on CIT's earnings call last month. After the OneWest merger, he can also boast of an expanded and diversified deposit base that lowered funding costs, a streamlined management structure and a return on tangible common equity that's above the cost of equity.
Ultimately, however, CEO legacies are measured in no small part by share prices, so the underperformance in CIT will most likely color Thain's. Part of it is probably not his fault. Bank stocks have been hammered on a variety of concerns this year, from their exposure to energy debt to an unfavorable interest-rate environment to general concerns, warranted or not, that a recession is looming. CIT is certainly not the only lender whose earnings estimates have fallen, and not the only bank stock trading near multi-year lows.
Like many bank stocks, CIT looks alluringly cheap even after the substantial rebound from the February lows. A simple return to its tangible book value would lift the shares by more than 50 percent. But for that to happen, the company needs to clean up the debris from the OneWest deal and successfully separate its aircraft-leasing business, and the clouds hanging over the economy and oil markets need to clear. As he ponders his next move, Thain will have to wait and see whether his fixes ever fully take hold or whether the turnaround was just stuck in place.
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