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CIT GROUP Financing Main Street

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CIT GROUP Financing Main Street ENGAGEMENT CASE STUDY CIT GROUP Financing Main Street Hermes SDG Engagement High Yield Fund, Q4 2019 For professional investors only CIT Group is a US national bank that offers lending, leasing and other financial services to consumers and small-and-medium enterprises (SMEs). Its commercial operation provides factory, real-estate, equipment, and railcar financing, while its consumer-banking arm includes a national online bank, CIT Bank, and a local lender, OneWest Bank. Aaron Hay Lead Engager Investment case Engagement context In our view, CIT Group is one of the strongest middle-market lenders in Because of its size, the company faces fewer complex issues when it the US. Of its $50bn in assets, 65% are derived from commercial banking comes to integrating sustainable investing principles and environmental and it has raised more than $35bn of deposits. These ‘sticky’ sources of and social risk management into its investment activities. But CIT Group’s funding, which tend to remain with financial institutions for long periods, focus on lending to individuals and SMEs means it remains highly exposed account for 85% of its funding and this is positive for credit investors. to product-governance risks. Because of this, CIT Group needs to offer The company has disposed of $14bn in non-core assets and it targets a ethically sound financial choices which are marketed responsibly. common-equity tier-one ratio of 10%, which we see as appropriate for the risk of its activities. Moody’s Investors Service and Fitch Ratings assign CIT Group has dealt with challenges in the past. Its Californian the bank Ba1 and BB+ respectively, and both have a positive outlook on operations faced allegations of controversial foreclosures and the company. mortgage-credit discrimination in the years following the financial crisis (although this was prior to OneWest Bank being acquired by CIT Group). It has also sold its reverse-mortgage business, which was alleged to have aggressively marketed to older customers. Branch locations of OneWest Bank, These historical issues make the group’s ability to create responsible CIT’s local bank products and market in an ethical way critical to its reputation. Given that many of the company’s customers come from its national OneWest Bank has 60 online bank, data privacy and robust cybersecurity are of paramount branches in California importance. Human-capital management will also remain a key focus, given CIT Group’s reliance on a digitally capable workforce to run and grow its online operations. All of the above dynamics indicate to us that there is potential for the company to create positive social and environmental impacts through engagements focused on the Sustainable Development Goals (SDGs). This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. Source: OneWest Bank, as at September 2019. SDG-focused engagement The drivers for our SDG-aligned engagement with the company, and our current objectives, are described below: SDG alignment Engagement theme Regional and local economic growth Financing positive change CIT Group’s focus on lending to SMEs and individuals (who may We would welcome further details about the extent of this lending, the borrow to invest in skills and enterprise) means it helps finance the financial results and social and environmental outcomes. A conversation ‘Main Street’ economy of California and the US. Because of this, an about how this activity can be improved to support the delivery of the opportunity exists for the company to contribute to regional and SDGs while being profitable would be a natural next step. economic growth, as well as the health of the labour market. This is particularly the case in places where CIT Group has already developed a local reputation and networks through its work as a good corporate citizen in California. SDG alignment Investing in local infrastructure CTI Group’s track record shows that it invests in resilient local infrastructure and small-business industrialisation through its use of SME equipment and capital financing. It also lends to SDG-related projects that have developed affordable housing in California and a 200-megawatt solar array in Texas. SDG alignment Engagement theme Local lending Financial inclusion The company appears to target investment of about $5bn, or 10% of We would like to understand how the company’s commitments are its assets under management, under the Community Reinvestment delivering more inclusive financial access. To do this, we will stress through Act, a US regulation that asks banks to lend to low- and medium- engagement that the bank must report beyond the value of community income households in the areas they operate branches in. investment in dollar terms. Given that there is no specific lending minimum that banks must meet, For example, if the company is enabling financial inclusion for traditionally this pledge could be significant in relation to investment by its peers. underserved and minority communities in California, it should disclose this positive activity. The company has also disclosed that it is focusing on financing affordable housing, small businesses, technical assistance and community development. Moreover, some lending will take place through organisations which facilitate community goals. Further engagement objective Credible, responsible marketing Theory of change A lack of data means it is difficult to assess the scale of CIT Group’s social-investment strategies and SDG-related impact. While the The legal and reputational challenges that CIT Group and its company does disclose partial outcomes like specific housing predecessors have faced in the past appear to be fading. But we still and energy projects which have been financed, we want it to believe that the company has some ground to regain in terms of its report consistently on how it is supporting industry, innovation and relationships with customers, local communities and regulators. infrastructure by financing the ‘Main Street’ economy. In the long term, we think CIT Group could use greater customer Indeed, we believe this could benefit both the bank’s reputation trust and strong community relationships as marketable assets. and the influence it has on its financial-services peers. Measurable We will encourage the company to aim not just for complete outcomes might include local job creation, new affordable-housing legal compliance, but for a best-in-class approach to ethical and tenancies, the number of small businesses created or upgrades to responsibly marketed products – particularly when compared to environmentally sound capital equipment. This would help drive its US and international peers. This should be accompanied by decent work and economic growth and support sustainable cities data that demonstrates rising customer trust. and communities. Hermes Investment Management We are an asset manager with a difference. We believe that, while our primary purpose is to help savers and beneficiaries by providing world class active investment management and stewardship services, our role goes further. We believe we have a duty to deliver holistic returns – outcomes for our clients that go far beyond the financial – and consider the impact our decisions have on society, the environment and the wider world. Our goal is to help people invest better, retire better and create a better society for all. Our investment solutions include: High active share equities, private markets, credit and responsible investment advisory services. For more information, visit www.hermes-investment.com or connect with us on social media: For professional investors only. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Hermes. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. Investing in smaller/medium sized companies may carry higher risks than investing in larger companies. Investments in emerging markets tend to be more volatile than those in mature markets and the value of an investment can move sharply down or up. Hermes Investment Funds plc (“HIF”) is an open-ended investment company with variable capital and with segregated liability between its sub-funds (each, a “Fund”). HIF is incorporated in Ireland and authorised by the Central Bank of Ireland (“CBI”). HIF appoints Hermes Fund Managers Ireland Limited (“HFM Ireland”) as its management company. HFM Ireland is authorised and regulated by the CBI. Further information on investment products and any associated risks can be found in the relevant Fund’s Key Investor Information Document (“KIID”), the prospectus and any supplements, the articles of association and the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the prospectus, the prospectus shall prevail. These documents are available free of charge (i) at the office of the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, 54- 62 Townsend Street, Dublin 2, Ireland.
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