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CIT Group projects CECL will have $50M-$100M capital impact

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CIT Group projects CECL will have $50M-$100M capital impact

CIT Group Inc. estimates that adopting the current expected credit loss accounting standard will require a reserve build as high as 60% and will reduce the bank's capital by as much as $100 million.

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At the Barclays Global Financial Services Conference, CFO John Fawcett delivered a presentation that included a breakdown of the impact of the new accounting standard, which will replace the incurred loss model. The bank's presentation detailed that CECL will reduce the bank's tangible book value by $50 million to $100 million and will require a $200 million to $300 million build in loan loss reserves.

In the second quarter, the bank reported $487.4 million of loan loss reserves, so the projected build for CECL amounts to a 41% to 62% increase in the company's reserves. The presentation stipulated that the CECL estimates do not include any impact from the bank's pending acquisition of Mutual of Omaha Bank.

Fawcett said the reserve build was largely driven by loans from the bank's legacy consumer mortgage business that are classified as purchased credit impaired, or PCI. However, those loans will not account for any of the capital impact associated with the CECL adoption. The capital impact will come from the bank's commercial loans and non-PCI consumer loans, which will have "marginal" and "moderate" impacts, respectively, on reserves.

Fawcett said the bank's CECL estimate uses a model that assumes "moderate economic growth, continued low levels of unemployment and a stable credit environment."