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Analysts see CIT Group's targets for Mutual of Omaha deal as 'aggressive'

Analysts expressed some skepticism that CIT Group Inc. management would be able to deliver on their expectations for the Mutual of Omaha Bank acquisition. At the same time, analysts wrote approvingly of the deal, suggesting it made solid strategic sense even if the financial metrics seemed challenging.

CIT Group executives highlighted the low-cost deposits acquired in the deal, especially the $4.5 billion of homeowners association deposits that carry a cost of just 63 basis points. Analysts were positive on how the deal lowers the cost and further stabilizes CIT Group's funding base. Brian Klock, an analyst for Keefe Bruyette & Woods, wrote that the company will aim to increase the HOA deposits to $9.0 billion over the next five to seven years.

CIT carries one of the higher funding costs in the industry at 1.93%. Mutual of Omaha Bank's average cost of funds across all its deposits is only 75 basis points.

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But a pair of analysts wrote that they thought management's forecast for the deal appeared overly rosy, though both analysts were generally positive on the deal. James Fotheringham, an analyst for BMO Capital Markets, wrote that there was some execution risk considering the company's targets imply more than 25% growth in Mutual of Omaha's earnings contribution to the pro forma company.

"We believe the deal is fairly valued and helps to improve CIT's deposit funding base with core strength in [Mutual of Omaha's] HOA deposit franchise," Klock wrote, pointing to the valuation of 138% of tangible book value and 11.6x the 2020 estimated earnings.

"We consider management targets as aggressive," Fotheringham wrote. He lowered earnings estimates for CIT Group for 2019 but raised his estimates for 2020 and 2021. He also raised his target price on the company to $52 from $50.

"[Mutual of Omaha's] deposits will buttress CIT's funding platform, but we raise our target less than our estimates, because execution risk (deal targets are aggressive) and increased leverage (forgoing accretive share repurchases) imply a lower near-term target multiple," Fotheringham wrote.

Scott Valentin, an analyst for Compass Point Research & Trading LLC, took a similar tack in his Aug. 14 note, calling the deal "strategically positive, financially less so." Valentin lowered his 2020 earnings estimate for the company to $5.06 per share from $5.27 per share. That is meaningfully lower than management's estimate of $5.42 earnings per share in 2020.

At the same time, Valentin reiterated a "buy" rating on the stock. "We view the acquisition positively from a longer-term strategic perspective for several reasons," Valentin wrote. He highlighted that the deal improves the company's deposit base by lowering the cost of deposits by 20 basis points. He also noted that the deal advances CIT's goal to become more "bank-like" and could lower its required capital levels by convincing the Federal Reserve the pro forma company will be less risky. Finally, Valentin noted that the more "bank-like" funding structure could make CIT Group a more attractive target for its own potential sale.