CIT Group's deal for OneWest Bank spurred every tough question facing the banking industry these days. And John Thain, CIT's chairman and chief executive, had ready answers for all of them.
Bankers, especially those pondering M&A deals, could learn a lot from his take on hot-button issues such as the tradeoff between scale and extra regulation, the future of retail banking and the tension between cost savings and investment.
Granted, many bankers may consider CIT and its leader unlikely teachers. Recent speculation centered on whether CIT, a nontraditional lender specializing in business loans, should sell to a big bank like Wells Fargo. And Thain was the former head of Merrill Lynch who left shortly after its controversial takeover by Bank of America at the height of the financial crisis.
Yet, CIT decided to be a buyer and chose OneWest, itself the vestige of an infamous bank failure. Time will tell whether the move worked, but Thain offered a clear game plan Tuesday as analysts peppered him with questions.
Aren't you concerned about the crushing costs of being regulated as a systemically important financial institution, as CIT will cross the $50-billion-asset threshold? We're ready to roll, Thain said.
"This transaction does put us over $50 billion, but we've been planning for that for the last several years and we believe that we're well-positioned to satisfy all of the criteria," Thain said during a Tuesday conference call.
Will you sell OneWest's $7.6 billion mortgage loan book, since the mortgage business is volatile and currently the pits? We like the yields and the risk profile of mortgage loans and don't plan to immediately try to sell them, Thain said.
What kind of cost savings do you expect to generate from the deal? CIT and OneWest's businesses have little overlap and we see limited opportunity for expense savings, Thain said.
Why do you want to purchase OneWest's 73-branch network, since branches have no future in banking? OneWest's branches provide a lower cost of funds and help CIT diversify its funding base, Thain said.
The last exchange is the most crucial because it addresses the key benefit of the deal for CIT (more deposits to fund lending) and the biggest potential drawback (SIFI status), said Sameer Gokhale, an analyst at Janney Capital Markets. The answer scored on both counts in his eyes.
"It almost seems like a marriage made in heaven," Gokhale said. "What CIT needs is a low-cost source of funding and they're marrying that with their loan-origination platform."
"[CIT] was so close to going over the $50-billion-asset threshold anyway," Gokhale said. "If you're going to go above it anyway, you might as well be proactive and go way above it."
After adding the $23-billion-asset OneWest, CIT will have total assets of about $70 billion. In the deal, CIT will pay $3.4 billion in cash and stock, representing a 120% premium over OneWest's tangible book value. OneWest shareholders will receive $2 billion of the $3.4 billion consideration in cash. The companies expect the deal to close in the first or second quarter.
The deposit and the SIFI questions are closely linked, Thain said on the conference call.
CIT's bank unit, which had assets of $16.8 billion, generates deposits through its online banking channels and through brokered certificates of deposit, according to its annual report.
Regulators had already told CIT it needed to address concerns about its deposit base and during those discussions, Thain queried regulators about passing the $50-billion-asset mark.
"One of the main comments that we heard back from the regulators on an ongoing basis is the fact that we didn't have core retail deposits," Thain said. "This transaction really satisfies one of the deficiencies that the regulators…thought we had when they looked at how we were capitalized and how we were funded."
Many of those concerns were addressed last year when the Federal Reserve Board terminated an enforcement action against CIT, Gokhale said. CIT had to submit plans for improvements to corporate government and risk management, review its loan-loss methodology and take other steps.
Although lawmakers are discussing whether to raise the $50 billion threshold for SIFI status, that change won't come any time soon. Meanwhile, analysts asked Thain numerous questions about the additional compliance costs of being a SIFI. New regulations that CIT faces include Federal Reserve Board-graded stress tests and greater risk management requirements.
CIT will need to commit some spending toward compliance upgrades, Thain said. But for the most part, OneWest has well-developed compliance processes, particularly in the area of Bank Secrecy Act/anti-money laundering compliance, the area that has repeatedly delayed M&T Bank's deal for Hudson City Bancorp.
"We believe their BSA/AML systems are state-of-the-art as are ours," said Scott Parker, CIT's chief financial officer.
OneWest held $7.6 billion in one-to-four family residential mortgages, as of March 31. Most banks' mortgage businesses are struggling. But CIT plans to let OneWest's mortgages run off the books, then "be replaced by newly originated commercial loans," Thain said.
"It would be difficult for us to replace that portfolio with [a cash investment's] kind of yield in this environment, so in fact, that it is an attractive portfolio," Parker said.
CIT is not buying OneWest for potential cost savings, as there is very little overlap of business lines, Thain said. For example, "we have a commercial real estate business, but our business is mostly East Coast and their business is mostly West Coast," he said.
"There will be some expense savings in some of the corporate infrastructure but for the most part this is additive," Thain said.
For OneWest, the deal represents the end of an investment forged at the onset of the banking crisis. OneWest was created in 2009 when an investor group led by George Soros and John Paulson bought assets of the failed IndyMac.
As a former failed institution, OneWest has a 10-year loss-share agreement with the Federal Deposit Insurance Corp. involving the IndyMac assets. CIT's acquisition is contingent on gaining approval for an extension of that agreement.
"We're confident that we will be able to get the approvals we need," Thain said.