A year after re-emerging as a public company, CIT ( CIT - Get Report) might've just stuck its head above water long enough to be picked off.

The stock ended trading Tuesday at $24.23, up 5% from its $23 a share initial offering price last July 3. The gain caps a three-month streak in which the New Jersey-based commercial lender has rallied more than 43%, ending a tumultuous year during which its $4.9 billion IPO looked like one of Wall Street's biggest duds.

Yet it may be too soon for investors to declare smooth sailing. For one thing, CIT still faces a potential big headache with its large aircraft leasing business, a profitable operation whose counterparts have recently caused trouble for other firms. Others, meanwhile, wonder how much longer the relatively small company can expect to compete with much larger lenders.

CIAin't Kidding

With an estimated $4.4 billion in airline assets, CIT's aircraft portfolio looks ripe for a writedown given the recent wave of airline bankruptcies and near-bankruptcies. Morgan Stanley ( MWD) two weeks ago took a $287 million charge to write down the value of its much-smaller aircraft leasing portfolio.

"They have huge exposure to aircraft, which is very dicey,'' said Timothy Ghriskey, president of Ghriskey Capital, a Connecticut hedge fund. (The fund doesn't own any CIT shares, nor has it sold any short.)

Concerns about the health of the aircraft segment prompted the research firm GimmeCredit last week to say the price of CIT's bonds is at a heightened risk for depreciation. A decline in asset quality "may slow earnings growth,'' the firm warned.

Until the company offers more clarity on its airline portfolio, Ghriskey said CIT's stock looks "appropriately valued'' trading at a shade above its book value of $23.62 a share.

CIT officials couldn't be reached for comment. The company reports earnings July 24.

Bigtime

Another concern for CIT investors is size. Even though CIT had a long history of independence before Tyco ( TYC) acquired it in 2001, its business landscape has changed dramatically since then, primarily because of the acquisition of smaller players. If nothing else, the Tyco acquisition -- which turned sour in Dennis Kozlowski's wake -- shows CIT was aware of the trend several years ago.

In recent years, former competitors Heller Financial, Foothill Capital and Century Business Credit each were gobbled up by bigger firms like Wells Fargo ( WFC - Get Report) and General Electric ( GE - Get Report).

Today, CIT's main competition doesn't come from similarly sized lenders, but big financial conglomerates such as GE Capital, Wells Fargo, Citigroup ( C - Get Report) and Bank One ( ONE - Get Report). And that could put CIT at a disadvantage, since bigger institutions generally pay less for their funding, especially when the bonds they issue carry a higher credit rating.

Moody's Investors Service, for instance, gives CIT's unsecured corporate debt an A2 rating. While sound, it's still five notches below the Triple A rating carried by GE Capital's bonds. (CIT and GE Capital both have top-rated commercial paper.)

Borrowing cheaply is critical because lenders' profitability depends on the spread between their own funding costs and what they charge borrowers. As recently as last month, CIT, in a corporate filing, said its funding costs were still higher than "traditionally experienced'' and that it expects earnings to "be negatively impacted for the foreseeable future, as results will continue to reflect more expensive borrowing spreads.''

"Over the long haul it's difficult to survive as an independent because the cost of capital is much less being part of a larger institution,'' said Sean Egan, president of Egan-Jones Ratings, a small bond-rating firm.

Egan-Jones gives CIT's unsecured debt a Triple B rating, slightly lower than the Moody's rating, because it's concerned about the company's aircraft leasing exposure. The rating firm also questions whether CIT has been aggressive enough in writing down the value of the $710 million in telecommunications assets in its lending portfolio.

In the end, Egan said he could see CIT being bought by a big bank that wants to increase its market share in lending to midsized businesses.