NEW YORK (TheStreet) -- CIT Group (CIT) could buy a retail bank with about $10 billion in assets, as the commercial lender looks to diversify its deposit base to include more retail deposits. However, the John Thain-run CIT may face challenges in buying a bank of such a scale without entering into a transaction that could be dilutive to its shareholders.
CEO Thain said on Wednesday CIT Group is looking to acquire a bank of significant size as the firm tries to broaden its funding sources. Traditional bank deposits, in contrast to Internet deposits or brokered CDs, are generally seen as more stable by regulators.
At CIT Group's annual investor meeting, Thain said bank deals that would keep CIT Group with less than $50 billion in total assets might not be worth it. At the end of the first quarter, CIT Group had $48.6 billion in assets.
Thain indicated if CIT Group were to exceed a threshold of $50 billion in assets, making it a systemically important financial institution in regulators' eyes, the firm would go well over that threshold with an acquisition. Thain also said CIT Group would be more interested in buying a retail bank outright than buying a set of bank branches.
Were CIT Group to announce a bank acquisition, it could be an important move for shareholders to think over. Credit Suisse analyst Moshe Orenbuch said on Thursday that CIT Group would likely look to buy a retail bank with $10 billion in assets.
Adding retail bank deposits may be a strategic imperative for CIT Group given regulators' focus on improving bank stability and the firm's efforts to grow its aggregate lending. However, CIT Group may not have all the cash it needs to buy a mid-size retail bank without using stock, raising the prospect a retail bank acquisition could prove slightly dilutive to shareholders.
Orenbuch calculates that CIT Group might need $3 billion in excess cash to acquire a retail bank with $10 billion in assets. Currently, the firm has $2 billion in excess cash in its banking subsidiary and $4 billion in excess cash at its holding company. Were CIT Group to decide to use its stock as an acquisition currency, it could prove slightly dilutive. CIT Group shares trade at about book value where possible retail banking targets are more likely to trade at 1.5 to 2 times book value, according to Orenbuch's calculations.
Beyond the price and composition of a possible retail bank acquisition, CIT Group's acquisitiveness could have a broader bearing on investor expectations about the firm. CIT Group's other way to acquire retail deposits would be to sell the company to a larger commercial banking competitor, something that has been speculated upon for years. Perhaps, CIT Group's apparent interest in a retail bank deal may cool such speculation.
"In the past, we have noted that the largest US banks would likely be precluded from making acquisitions, particularly those which included a bank. CIT in its current configuration is likely too large (or more accurately would have large concentrations) that could deter a smaller bank from acquiring it. In our view, management's apparent lack of interest in exploring a transaction with its aircraft business means that it is unlikely to purse this option," Orenbuch, the Credit Suisse banking analyst noted in a Thursday client note.
Thain, a longtime Goldman Sachs executive and the CEO of Merrill Lynch when it was sold to Bank of America in 2008, helped CIT Group navigate its exit from bankruptcy during the financial crisis, and has put the firm on a path to increase commercial lending as competitors like AIG (AIG) and GE Capital (GE) rationalize their extensive financial services activities.
While many Wall Street watchers have expected Thain to eventually look at selling CIT Group, a regulatory landscape that has constrained the acquisitiveness of large banks may mean he has now turned to a buyer in the banking sector.
CIT spokesperson Curt Ritter declined to comment beyond Thain's remarks Wednesday.
-- Written by Antoine Gara in New York