CIT GROUPFinancing Main Street

Hermes SDG Engagement High Yield Fund, Q4 2019

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.

ENGAGEMENT CASE STUDY

Aaron Hay Lead Engager

Engagement contextBecause of its size, the company faces fewer complex issues when it comes to integrating sustainable investing principles and environmental and social risk management into its investment activities. But CIT Group’s focus on lending to individuals and SMEs means it remains highly exposed to product-governance risks. Because of this, CIT Group needs to offer ethically sound financial choices which are marketed responsibly.

CIT Group has dealt with challenges in the past. Its Californian operations faced allegations of controversial foreclosures and 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.

These historical issues make the group’s ability to create responsible products and market in an ethical way critical to its reputation. Given that many of the company’s customers come from its national online bank, data privacy and robust cybersecurity are of paramount 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).

Investment caseIn our view, CIT Group is one of the strongest middle-market lenders in the US. Of its $50bn in assets, 65% are derived from commercial banking and it has raised more than $35bn of deposits. These ‘sticky’ sources of funding, which tend to remain with financial institutions for long periods, account for 85% of its funding and this is positive for credit investors. The company has disposed of $14bn in non-core assets and it targets a 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 the bank Ba1 and BB+ respectively, and both have a positive outlook on the company.

Source: OneWest Bank, as at September 2019.

Branch locations of OneWest Bank, CIT’s local bank

60branches in California

OneWest Bank has

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Theory of changeA lack of data means it is difficult to assess the scale of CIT Group’s social-investment strategies and SDG-related impact. While the company does disclose partial outcomes like specific housing and energy projects which have been financed, we want it to report consistently on how it is supporting industry, innovation and infrastructure by financing the ‘Main Street’ economy.

Indeed, we believe this could benefit both the bank’s reputation and the influence it has on its financial-services peers. Measurable outcomes might include local job creation, new affordable-housing tenancies, the number of small businesses created or upgrades to environmentally sound capital equipment. This would help drive decent work and economic growth and support sustainable cities and communities.

The drivers for our SDG-aligned engagement with the company, and our current objectives, are described below:

SDG-focused engagement

SDG alignment Regional and local economic growth

SDG alignment Investing in local infrastructure

SDG alignment Local lending

Engagement theme Financing positive change

Engagement theme Financial inclusion

CIT Group’s focus on lending to SMEs and individuals (who may borrow to invest in skills and enterprise) means it helps finance the ‘Main Street’ economy of California and the US. Because of this, an opportunity exists for the company to contribute to regional and 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.

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.

The company appears to target investment of about $5bn, or 10% of its assets under management, under the Community Reinvestment Act, a US regulation that asks banks to lend to low- and medium-income households in the areas they operate branches in.

Given that there is no specific lending minimum that banks must meet, this pledge could be significant in relation to investment by its peers.

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.

We would welcome further details about the extent of this lending, the financial results and social and environmental outcomes. A conversation about how this activity can be improved to support the delivery of the SDGs while being profitable would be a natural next step.

We would like to understand how the company’s commitments are delivering more inclusive financial access. To do this, we will stress through engagement that the bank must report beyond the value of community investment in dollar terms.

For example, if the company is enabling financial inclusion for traditionally underserved and minority communities in California, it should disclose this positive activity.

Further engagement objective Credible, responsible marketing

The legal and reputational challenges that CIT Group and its predecessors have faced in the past appear to be fading. But we still believe that the company has some ground to regain in terms of its relationships with customers, local communities and regulators.

In the long term, we think CIT Group could use greater customer trust and strong community relationships as marketable assets. We will encourage the company to aim not just for complete legal compliance, but for a best-in-class approach to ethical and responsibly marketed products – particularly when compared to its US and international peers. This should be accompanied by data that demonstrates rising customer trust.

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