CIT Group Inc. Ratings Placed on Creditwatch Positive Following Merger Announcement

Research Update: CIT Group Inc. Ratings Placed On CreditWatch Positive Following Merger Announcement

October 20, 2020

Overview PRIMARY CREDIT ANALYST

- On Oct. 16, 2020, CIT Group Inc. (CIT) announced it had agreed to merge with First Citizens E.Robert Hansen, CFA BancShares Inc. in an all-stock transaction. We expect the merger to close in the first half of New York 2021. (1) 212-438-7402 robert.hansen - The merger will create the 19th-largest bank in the U.S. with roughly $110 billion in total assets. @spglobal.com The companies expect $445 million in merger-related expenses and project cost savings of 10% SECONDARY CONTACT of noninterest expenses. Rian M Pressman, CFA - We are affirming our 'BB+/B' ratings on CIT Group Inc. and our 'BBB-' rating on CIT Bank N.A. At New York the same time, we are placing both entities on CreditWatch with positive implications. (1) 212-438-2574 rian.pressman - The CreditWatch listing reflects our view that the merger will, over time, improve the company's @spglobal.com funding profile, result in better loan diversification, and benefit profitability. However, we view integration challenges as significant given the relatively low overlap between the companies.

Rating Action

On Oct. 20, 2020, S&P Global Ratings Services affirmed its 'BB+/B' ratings on CIT Group Inc. (CIT) and its 'BBB-' rating on CIT Bank N.A., its primary bank subsidiary. We also placed the ratings on both entities on CreditWatch with positive implications.

Rationale

The CreditWatch placement reflects our view the merger will, over time, improve CIT's funding, result in better loan diversification, and benefit profitability. CIT and First Citizens BancShares Inc. expect the merger to close in the first half of 2021, creating the 19th-largest bank in the U.S. based on assets with roughly $110 billion in total assets (First Citizens BancShares Inc. $49 billion; CIT Group Inc. $61 billion).

However, we view integration challenges as significant given the relatively low overlap between the two companies. The companies have successfully integrated acquisitions in the past; however,

www.spglobal.com/ratingsdirect October 20, 2020 1 Research Update: CIT Group Inc. Ratings Placed On CreditWatch Positive Following Merger Announcement

we view this transaction as significantly larger and more complex. There are significant challenges with the acquisition, including the size and complexity of this merger relative to previous mergers, the business models of both companies are fairly different, and the retention of key operating personnel at CIT is key.

We expect asset quality will continue to be challenged from the current economic slowdown precipitated by COVID-19. The combined allowance for credit losses will be approximately $1.8 billion, representing approximately 2.4% of the loan portfolio, and CIT's loan book will be marked-to-market post-acquisition. Although the substantial build in loan loss allowances and expected credit marks is supportive for creditors, we also believe these results reflect the higher risk profile of CIT's loan portfolio.

We think capital ratios could come under pressure at closing given we expect the merged company to have a common equity Tier 1 ratio (CET1) of roughly 9.4% and a Tier 1 risk-based capital ratio of 10.5% at closing, hurt by $445 million in merger-related expenses. However, the companies project the merger will achieve cost savings of approximately 10% of noninterest expenses ($250 million fully phased-in) and substantial funding benefits, in part due to First Citizens' diversified and low-cost deposit base.

CIT also reported third-quarter results, which were better than recent quarters but still worse than last year. Specifically, net income was about $86 million, net finance margin was 2.27%, and net charge-offs were 0.71%. Deferred loans declined materially in both commercial and consumer loan portfolios. Capital ratios inched lower and were down significantly year over year. The CET1 ratio fell to 9.9% as of Sept. 30, 2020, from 12.0% as of Dec. 31, 2019, because of the Mutual of Omaha Bank acquisition and large net losses year-to-date, hurt by CECL adoption and reserve build. We expect profitability will likely remain weak on the back of continued pressure on asset quality and the net finance margin.

CreditWatch

S&P Global Ratings' CreditWatch placement reflects our view that we could raise the ratings on CIT as a result of the merger. Specifically, we could raise the ratings by one notch if we were to believe that the company's funding profile, earnings accretion, and business line diversification are expected to meaningfully improve at the successful close of the merger. While we expect loan losses to remain elevated for the banking sector as a result of the pandemic, we could consider raising the ratings if improved diversification were to sustainably lower our projected expected losses from the combined company relative to peers. An upgrade will depend, in part, on our view of integration challenges remaining manageable, despite considerable execution risk, and our view of the combined company's capital management.

Conversely, we could revise the outlook to negative if the announced merger does not close, which could suggest unforeseen problems; if loan performance deteriorates meaningfully, particularly within more vulnerable loan portfolios; or if overall financial performance declines materially.

Ratings Score Snapshot

Issuer Credit Rating: BBB-/Watch Pos/--

Bank Holding Company Rating: BB+/Watch Pos/B

SACP: bbb-

- Anchor: bbb+

www.spglobal.com/ratingsdirect October 20, 2020 2 Research Update: CIT Group Inc. Ratings Placed On CreditWatch Positive Following Merger Announcement

- Business Position: Moderate (-1)

- Capital and Earnings: Strong (+1)

- Risk Position: Moderate (-1)

- Funding and Liquidity: Below Average and adequate (-1)

Support: 0

- GRE Support: 0

- Group Support: 0

- Sovereign Support: 0

Additional Factors: 0

Related Criteria

- General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019

- General Criteria: Group Rating Methodology, July 1, 2019

- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017

- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

- Criteria | Financial Institutions | Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013

- Criteria | Financial Institutions | Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011

- Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

- Criteria | Financial Institutions | Banks: Commercial Paper I: Banks, March 23, 2004

Related Research

- Comparative Statistics: U.S. Banks (October 2020), Oct. 12, 2020

- Rating Component Scores For U.S., Canadian, And Bermudian Banks (September 2020), September 30, 2020

- U.S. Regional Banks Report Weak Second-Quarter Earnings As Provisions Rise And Net Interest Margins Plummet, Aug. 27, 2020

- Outlooks On 13 U.S. Banks Revised To Negative Due To Economic Downturn From COVID-19, May 4, 2020

- Six U.S. Regional Banks Outlooks Revised To Negative On Higher Risks To Energy Industry, March 27, 2020

- Outlooks On Six Banks Revised To Stable From Positive On Emerging Economic Downturn;

www.spglobal.com/ratingsdirect October 20, 2020 3 Research Update: CIT Group Inc. Ratings Placed On CreditWatch Positive Following Merger Announcement

Ratings Affirmed, March 23, 2020

- Optimism And Growth Aspirations Are Fueling An Increase In U.S. Bank Mergers And Acquisitions Despite A Maturing Credit Cycle, Oct. 15, 2018

Ratings List

Ratings Affirmed; CreditWatch Action

To From

CIT Group Inc.

Issuer Credit Rating BB+/Watch Pos/B BB+/Negative/B

CIT Bank N.A.

Issuer Credit Rating BBB-/Watch Pos/-- BBB-/Negative/--

CIT Group Inc.

Senior Unsecured BB+/Watch Pos BB+

Subordinated BB/Watch Pos BB

Preferred Stock B+/Watch Pos B+

CIT Bank N.A.

Senior Unsecured BBB-/Watch Pos BBB-

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

www.spglobal.com/ratingsdirect October 20, 2020 4 Research Update: CIT Group Inc. Ratings Placed On CreditWatch Positive Following Merger Announcement

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