Q1 2020 Earnings Call
Thursday
Thursday
Dead dead dead, good morning and welcome to cits first quarter 2020 earnings conference call. My name is Alyssa and I will be your operator to suck at this time. All participants are in a listen-only mode. There will be a question-and-answer session later in the call to ask a question. You may press * then 1 on your touchtone phone.
To withdraw your question, please, press * then two. If at any time during the call you require assistance, please press * 0 and an operator will be happy to assist you. As a reminder. This conference call is being recorded. I would now like to turn the call over to Barbara Callahan head of investor relations. Please proceed ma'am.
Thank you, Alyssa. Good morning, and welcome to see I teased first quarter 2020 earnings conference call our call today will be hosted by Ellen Alemany chairwoman and CEO off and John Fawcett our CFO. Also joining us for the Q&A discussion is our chief credit officer, Marissa Hardy during this call will be referencing their earnings presentation as well as a supplemental presentation that describes our preparedness and response to covid-19. Both are available on the investor relations section of our website at our forward-looking statements dishwasher and non-gaap reconciliations are included in today's earnings materials and within our SEC filing these cover our presentation materials prepared comments and questions and answers segment of today's call now turn the call over to Ellen Alemany.
Thank you Barbara. Good morning everyone and thanks for joining the call wherever you're tuning in from. I hope you are safe. And well, the first quarter has clearly presented a new paradigm for both of us and a personal and economic challenges related to the covid-19 pandemic have been unprecedented oftentimes periods of great challenge provide an opportunity to also test the company office and values and these past few months have tested us and demonstrated that we have the fortitude to navigate the issues before us.
see I
Today is the result of a multi-year Enterprise transformation that has led to an organization with ample liquidity sufficient Capital substantially less risk in the portfolio Nimble operation capacity leading franchises with deep expertise supporting them for Diversified and stable core deposit channels and a seasoned management team that knows how to navigate Dynamic environment. We enter 2020 with a much stronger Foundation, which has enabled us to actively respond to the challenges presented by this pandemic as well as some of our key strategic initiatives in the quarter. Let me touch on our covid-19 sponsor first and then I'll share other highlights from the quarter in a matter of weeks. We have effectively transformed the way we operate while also prioritizing the health safety and financial needs of our employees customers and communities.
First and foremost we work to insure our employees were safe and we took a number of steps early in the process to enact the best available guidance on healthy workplace protocols and social thing. We were one of the first things to police Chef to remote working model and key Urban centers like New York City and Chicago as the outbreak started to progress in mid-march currently 93% of our employees are effectively working remotely as a result of our investments in technology and the digital transformation. We put in place over recent years. This is the best in class standard in their industry and a vital part of our business continuity. We also continue to evolve our workplace protocols as more information is available on reducing the spread of this virus and understanding the best ways to ultimately emerge from the current activation measures. We are offering enhanced health benefits for Kovac testing and care as well as ongoing birth.
Just programming to help employees through the stress and isolation of these new lifestyle of requirements. We implemented an enhanced pay plan for employees that are not able to work remotely wage providing vital services and support of our business and I'm proud to say that all of our branches remain open in able to serve customers. We've modified hours and enhance safety package, but we remain open for business.
We're also focused on working with our customers who have been affected by the pandemic and providing relief when we can we are working with more than 8,600 small businesses primarily in our business office Capital division to provide them deferrals on their existing loans and leases we quickly stood up an entirely new operational process in order to participate in the government wage paycheck Protection Program. We're providing mortgage forbearance to borrowers. We're waiving speed so customers can access deposits without penalty and we continue to have ongoing dialogue with our commercial clients and offer them are Banking and structuring expertise and assistance in navigating during this. We know is is a challenging time for many and we're committed to working with our customers commitment to our communities remains very important as well and see i, t has committed 1 million dollars to support nonprofit partners with covid-19.
in relief efforts in our key markets
Well, this is still an evolving landscape. I'm proud of the way we've been able to adapt to the situation and demonstrate our resilience and commitment to do what's right for our team our customers Arkham. Ultimately our shareholders.
Turning to the quarter. Our results were primarily affected by the impact of the pandemic on the macroeconomic environment which led to an increase credit reserves and a Goodwill impairment off the option of Cecil which dramatically changed the credit Reserve model and then a volatile. And the completion of the Mutual of Omaha Bank acquisition which added about eight billion dollars of assets and six billion of deposits and impacted the comparability of our results versus prior.
We posted a net loss of $628 or $6.40 per diluted common. Share due to the increased credit reserves and Goodwill impairment Long John will go into more detail on the underlying drivers of performance, but I first wanted to touch on a few key highlights.
We completed the acquisition on Jan one and immediately kicked off her integration efforts, which remain on tract and are expected to be completed by your end. We improved their deposits by 34 basis points in the quarter through the addition and growth of the home owner association deposit Channel and also through our efforts to further optimise funding and the consumer Channel.
The Community Association banking business, which is the division that drives the HOA deposits has been off to a strong start and had one of their best growth quarters every month between the existing portfolio and the growth and the quarter that business added another five billion of lower-cost deposits two cits funding profile and further bolstered our deposit base. We have already made investments in this business and launched a new Reserve deposit product Suite as well as expanded our sales team and we expect to remain on track doubling the size of this business and five years.
Our balance sheet remains strong ending the quarter with more than $42 billion into positive and 9.5 billion in liquid assets.
A court average loans and leases were up 1% from the prior quarter excluding the acquisition our loan and Lease to deposit ratio at the bank increase the wage increase slightly the 95% and we remain on target with our expense initiatives managing our risks remain critically important as it has been for some time.
We have maintained prudent underwriting standards and are thoughtfully originating business in areas where we believe there are opportunities. We continue to proactively manage our life and over recent years. We have sold or significantly reduced our high-risk portfolios and shifted to more collateral based lending. We know there are still some portfolios that will be the stress of the economic disruption more than others and we have shared more disclosure in the covid-19 on Stacks that was posted today.
I would
Touch on two key areas, which are energy and Retail is you know, where a leader in the power and renewable space and have continued to grow that part of our power and energy business. We do have a loan exposure to oil and gas though and it is comprised of about a billion dollars and funded exposure most of which is secured and represents about 3% of our total loans.
Exposure to the retail sector is primarily in our factoring business and half of that factoring exposure is made up of our top 10 customers which are investment-grade or near investment-grade companies. Our client base is fairly Diversified across consumer segments, and we continue to have frequent dialogue with our clients and we're closely with them through this. I'm clients have also shifted their business to produce or procure mathcounts another much-needed items for the fight against the coronavirus and we're pleased to help support them in those efforts.
We are closely monitoring these and other portfolios that may be further impacted as a result of the current economic environment.
As mentioned this quarter, we adopted Cecil and we leverage the capital stress testing capabilities. We built when we were a c car Bank.
We conducted a robust process as we set our reserves that reflected what our best view of the economic environment was at that point in time and its potential impact on the portfolio not going forward jungle walk you through the details of that process shortly. And as we mentioned we also have our chief credit officer Marissa Varney available for Q&A later in the court summarized. We have ample liquidity and a robust stress testing process to ensure we can meet our funding needs even in a stressed environment month. We continue to run severely adverse stress scenarios, even though we are no longer subject to the Sea Car process which informs their Capital level.
A reserves are strong covering 2.9% of loans and we have an additional 120 million of allowance for off-balance-sheet credit exposures am confident in our ability to respond to the challenges before us and whether this economic downturn the work we have done in recent years has best positioned up for this. We are actively managing every facet of the company and the continuity of our business and with that. I'll turn it over to John.
Thank you Ellen a good morning everyone our results this quarter reflect three key events during the quarter first the acquisition of Mutual of Omaha Bank on January 1st, which is perhaps the comparability of our financial results to Prior quarters.
Second we adopted Cecil in January 1st given that the Cecil standard introduces economic forecasting into the allowance for credit loss process the impact of the covid-19 Panthers significantly increased our first quarter provision for credit losses.
The deterioration of the macroeconomic environment triggered an interim Goodwill assessment the quarter-end that resulted in a Goodwill impairment.
Is there an indication while I headed this crisis we completed in significant transformation of our business that strengthen our risk profile and focused our priorities. We strengthen our balance sheet as the page now constitute 84% of our total funding and we eliminated less stable sources of wholesale funding and we strengthen our risk management practices sold Wireless portfolios shifted our portfolio to more collateral based loans and significantly decreased are criticized assets which are down 10% off a year ago.
As a result of our transformation, we entered this challenging environment with a stronger balance sheet to support our customers clients communities and employees as we navigate through this.
We provided supplemental presentation on a website that describes our preparedness and response to covid-19 including descriptions of our transformation or Britain operational response and our liquidity funding and capital position.
Before I get into the results for the quarter, I want to point out that our funding and liquidity levels remain strong and we believe sufficiently to endure the current cycle. Our liquidity position is based on a robust stress testing process to ensure we are able to meet expected and contingent funding needs under combined idiosyncratic and markets Thursday. We are well-positioned to endure this stressed environment.
At the end of the quarter we maintained 9.5 billion dollars of liquid assets comprised of available cash and unencumbered securities making up approximately 16% of total assets.
We also had 3.5 billion dollars of availability under are contingent liquidity sources through secured facilities and our corporate revolver.
In addition or funding mix is substantially deposit-based and diversified across multiple channels, including our new stable lower-cost HOA deposit Channel it from the Mutual of Omaha Bank acquisition which had a record quarter of the positive growth and yelling indicated. We were off to a good start and we remain committed to doubling this deposits change over the next five years or alone at least to deposit ratio stands at 95% at the bank and 109% on a Consolidated basis.
We also have access to unsecured debt markets at both the bank and the bank holding company over the years. We have flattened in staggered our debt maturity schedule and as a result, our next unsecured maturity is only five hundred million dollars and not due until March of 2021.
Our Capital position is sufficient to withstand a severely adverse stress scenario that includes both market and idiosyncratic stresses.
While we were no longer speak our bank we continue to run our own models using the severely adverse stress scenario provided by the Federal Reserve.
We ended the quarter with a common Equity Tier 1 ratio of 9.7% reflecting the Mutual of Omaha Bank acquisition on January one, which reduced the common Equity Tier 1 ratio to approximately 10% and the adoption of Cecil which is a result of the current macroeconomic forecasts and it for four hundred five million dollars to our credit provision.
Throughout the month of March we continue to assess changes in macroeconomic scenarios as the impact of the pandemic accelerated globally. We analyzed and modeled various name is from a third party that is widely used in the industry to quantify the sensitivity of the allowance for credit loss or ACL to changes in the underlying macroeconomic forecasts.
We ultimately utilize and updated Baseline scenario which reflected expectations for economic impacts from covid-19 as of March 20th, and added an additional downside wage adjustment that took into consideration developments heading it to quarter-end.
The Baseline scenario assumed overturned economic growth in late 2020 while the downside adjustment incorporating more stressful scenarios these additional suggest a more efficient procession with a reduction in annualized Real GDP growth of close to 20% in the second quarter of this year as well as a less volatile but prolonged u-shaped recession that assumed an elevated unemployment rate through early 2022.
We also took into consideration scenario probabilities potential impact of government support for our Capital stress, testing results and the limitation of models off of high degree of volatility is introduced to the macro forecasts.
We estimate that the impact of the additional Reserve reduced Capital by about sixty basis points after adjusting for the new five-year transition for the interagency interim final rule. We provided a common Equity tier one walk in the appendix of the earnings presentation that highlights the impact of the transition rules.
We maintain our commitment to our Regulators to raise our common Equity Tier 1 ratio to our Target level of 10.5% Although our timing to achieve that goal may not be lower than initially expected based on our current capital in rwa levels. We have a capital buffer of 1.2 billion dollars when compared to the Federal Reserve minimums, including the capital conservation proper levels.
Provide some additional context around the sufficiency of our Capital levels with respect to ongoing uncertainty the economic environment and Cecil reserves for loan losses. We conducted a choice and Alice is leveraging our 9 quarter humid of law straight from our 2019 severely adverse stress scenario to our current levels of loans.
This scenario reflected a deep and prolonged recession with declines in GDP for seven consecutive quarters and an unemployment rate in excess of 8% for all. I thought for the first three quarters. He came at 10% based on this sensitivity. Our current Reserve level one point 1 billion would be about 60% of the employed stress choices over 9:40. Implying an increase in the Cecil reserve of approximately $800 compared to the march of 31 reported amount.
We looked at our Capital stress test later this year as markets globalize and intend also to run the federal reserve's twenty-twenty severely adverse Preston area applied by the Banks before we get into the details. I want to let you know that giving you a certainties created by the covid-19 pandemic on the current macroeconomic environment month. We are withdrawing around look for the full year twenty-twenty in our medium-term return on tangible, detect we target.
Turning to the financial results on slide three of the presentation. I will refer to the first quarter 2020 earnings slide deck.
We reported a gaap net loss of $620 or $6.40 per diluted share during by a Goodwill impairment and a higher credit provision bought the result of the markets driven by the covid-19 pandemic.
Don't worry items are listed on Slide Five and included an after-tax Goodwill impairment charge of $339.
The deterioration of the macroeconomic environment the low-rate environment and in particular the decrease in cits and pure Bank stock prices triggered a ninja Goodwill impairment assessment that resulted in an impairment charge.
The charge is not include the Goodwill recognized for the acquisition of Mutual of Omaha Bank and his non cast is a non-cash charge and did not have any impact of regulatory capital.
Other noteworthy items resulted from the Mutual of Omaha Bank acquisition and included the $37 after tax Cecil reserve on acquired non PCV loans that flow through the p&l as a credit originally on the day of acquisition the charge represents a double counting of credit risk in both the purchase price and the allowance built.
In addition, we recognize fourteen dollars and after-tax merger and integration costs excluding noteworthy items. We reported a net loss of $230 or $2.43 per share reflecting the credit provision of which $405 million or $332 after tax is driven by the forecast in a macroeconomic environment.
It's like six and seven highlight our net Finance Revenue in margin that Finance Revenue Grew From the prior quarter reflecting higher assets from your Mutual Bank acquisition on January 1st and gross that are for loans and leases. However, net Finance March and declined to 273 as the Swift 150 basis point cut and the FED rates fed funds rate this quarter and lower lower levels resulted in a significant reduction in yields on a floating rate loans and securities.
Reduction in heels heels holster reflects the addition of the Mutual of Omaha Bank loans and securities that are lower yielding.
We also recognize nine million dollars of a creek accelerated premium amortization are MBS portfolio reducing margins by 6 basis points and Loan prepayment level spell significantly as a result of the current environment reflecting resulting in lower prepayment related benefits.
You know real business operating lease revenues declined further than expected as utilization declined to about 91% from 94% last quarter renewal rates price down 18% on average in maintenance costs were higher including increased storage cost from Off Lease cars.
Lower borrowing costs offset some of the impact on the field and the addition of lower-cost HOA deposits for Mutual of Omaha Bank Lower Market rates in pricing actions across all our deposit channels resulted in a reduction in deposit rates.
Other know what interesting come improved to 131 million dollars and is Illustrated on slide eight. The increase reflects higher net games on sales of assets investments in fee income from last quarter included activity from our Community Association business acquired from the Mutual of Omaha Bank.
Capital markets fees increased modestly as we continue to build momentum earlier in the quarter before the challenges of the covid-19 pandemic. We got a minimum wage position at the end of the quarter and took a $4000000 more which we believe is appropriate to clear these positions in the coming months.
Even the historic level of interest rate volatility. Our customer derivatives business had a record quarter. However, the increase was more than offset by a negative bar of eight million dollars on credit valuation of choices given widening credit spreads.
Factoring commission's were down reflecting lower factoring volume from seasonality and the Slowdown later in the quarter resulting from the current macroeconomic environment.
We generated about $14 of gains on the sale of Securities as we took advantage of opportunities in the fixed-income market and sold some of our investment Securities including non. Hqla Securities acquired for Mutual of Omaha Bank.
As part of our ongoing portfolio risk management activities. We opportunistically sold PCP loans from the Legacy consumer mortgage portfolio.
Well, how are you feeling? We generated approximately $13 in gains further reduce our risk profile and released Reserves.
Looking into the second quarter. We see the following tricks.
Significant reduction in factoring volume reflecting a full quarter impact from the covid-19 and the US retail shut down which will impact commissions significantly.
As part of our portfolio management activity of our rental Fleet gain on sale of rail cars have been running between fifteen and twenty five million dollars per quarter. We expect lower game score as we will likely delay some of that activity to later in the year given the dislocation in the market.
We will continue to look for opportunities to selectively prove the LCM portfolio Willow. The current environment may make this challenging in the near-term.
In terms of Capital Market activity. We continue to see opportunities to lead transactions in our core Industries less impacted by the current environment. Although we are pursuing more Arrangements in this month.
These deals are likely to have stronger structural Protections in water spreads.
Our Capital markets pipeline is reasonably strong in those Industries. Although predicting when deals will come together is still uncertain.
Turning to slide nine. We continue to be disciplined on the management of our expenses and remain focused on achieving the additional fifty million dollars in net cost reductions in 20 21 months along with the additional 30 million dollars in cost synergies. We committed to from the Mutual of Omaha Bank acquisition.
The increase in operating expenses this quarter primarily reflects the addition of Mutual of Omaha Bank and seasonality and to a lesser extent from first quarter benefit restarts home or 20/20. We still expect to achieve the $16 in cost synergies related to the Mutual of Omaha Bank acquisition.
Flight eleven it provides more detail on average loans and leases by division.
Excluding the six point three billion dollars in loans or foreign from a Mutual of Omaha Bank or average score loans and leases increased by 1% in Commercial Banking law applies were strong heading into the quarter and while Market sentiment shifted dramatically in March following the acceleration of the covid-19 pandemic. We continue to close deals for our clients.
Origination lines about 30% from the year-ago quarter and essentially flat compared to the fourth quarter.
More of a prepayment slowed considerably in commercial finance and real estate Finance contributing to acid growth.
Are utilization increased in the second and third week of March is closed ruin their lines even increased business uncertainty. Although defensive draws started to moderate towards the end of the month and had been mine since the beginning of April.
Even our middle-market Focus. We generally don't participate in large revolving loans. And therefore we don't expect the seemingly to see the same level of revolver grows as some of our regional Bank peers last week. We have funded 620 million dollars of defense and defensive draws for our clients across Commercial Banking a little over a third of those drawers were in Commercial Services are back in business with a little more than half across the rest of commercial students and the rest of the real estate advanced.
Our increased focus and Treasury and payments Services help us to retain a significant portion of these drawers as commercial businesses.
It's only indicated. We are working with small business customers to provide payment deferrals for up to three months for qualified customers impacted by the economic events brought upon by covid-19 respect these loan modifications to meet the requirements to suspend TDR classification in any related impairment for accounting purposes.
Macroeconomic environment is also added pressure to the North American rail industry.
Real car loadings generally deployed as the impact of covid-19 has put more pressure on Industrial sectors and low oil prices have reduced card to be in that sector. We are seeing more resilient in demand for our cars carrying rain and Plastics.
Even the macroeconomic environment we expect further deterioration and now think our lease rates will re-price down 20% in 2020 and utilization could decline to the mid to high 80% area off the next twelve months depending on the duration of lower oil prices and the covid-19 pandemic.
We were staying in close communication with our real customers and stand ready to support them through this prices.
We have a diversely broad Market coverage servicing a wide range of Industries are strategies to remain Vigilant on asset Readiness and ensure that we have the cars that meet our customer demand requirements.
The average age of our Fleet is 14 years the youngest in North America. We have more higher load capacity cars which maximizes shipping optimization for our customers and our stock market position in management team as well as our customer service positions us well to navigate the current environment.
Moving on to the pods on page thirteen, we're off to a good start in our new lower-cost HOA channels as we focus on doubling these deposits over the next five years first-quarter growth tends to be seasonal in line and this year the team had their highest growth rate ever. We ended the quarter with just over five billion dollars in deposits wage expect continued growth in line with expectations as we move further into the year.
average overall
Possum cost declined 34 basis points to 150 basis points reflecting the mix of lower-cost deposits from the acquisition as well as continued downward repricing in all of our channels either direct Bank. We continue to monitor the market remain competitive and products that align with our strategy as we optimize costs and funding needs money.
Or direct Bank deposits have grown a little over a billion dollars from the start of the quarter and we lowered our non maturity deposit rates by five basis points in April 5th, and another fifteen basis points on April 20th.
Direct Banks including ourselves have reduced their rates for CD's and savings products, but we have not seen a significant reduction in alignment with the sharp reduction in fed funds rate with that said we expect over time. We will we will see larger rate reductions in on maturity deposits from online banks ourselves included.
Slide fourteen highlights our credit trends that charge increase this quarter and what primarily driven by oil and gas loans most of which were Acquired and Mutual of Omaha Bangkok station and an increase in the business Capital division mostly related to transportation.
We're not a cruel loans the increase in consumer banking relates to the accounting presentation for BCD loans, which upon the adoption of Cecil are now subject to the same presentation is disclosure as non PCD loans.
Adoption of Cecil and a Mutual of Omaha Bank acquisition increased our ACL on January 1st by $280 representing a coverage ratio of about 2% off note that $141 of this increase relates to PCD loans, and therefore did not impact, No.
In the first quarter, we significantly increased those reserves to 1.1 billion dollars due to the impact of the covid-19 environment bringing our coverage ratio to 2.9% of total loans. We also added $65 to our allowance for off-balance-sheet credit exposures bringing total reserves for on and off balance sheet exposures to over one point two billion dollars. We've included a page in the appendix of the presentation to provide some more detail on the components of the reserve.
Those that are ACL Reserve is appointment to measure that will continue to be informed by Ever Changing macroeconomic conditions and impact variables.
Laura turn it back to Ellen. I wanted to highlight that we also provided covid-19 supplemental information additional information on portions of our portfolio expected to be more impacted by the current month of it including retail exposure within our factoring business which consists principally of unsecured short-term discretionary lines. And where are top 10 customers who constitute about 50% of our exposure or investment-grade or near investment-grade oil and gas loans which are geographically Diversified across major producing basins and we're took me about half of our lower exposure is to reserve base blows borrows with exposures to commodity prices are predominantly hedged into 20 20 20 and 21 month.
retail and
Hotel exposure within our real estate finance division which are backed by strong sponsors. With whom we have long-term relationships Senior Living exposure, which is geographically Diversified gaming exposure, which is more reasonable to more Regional borrowers as opposed to tourist destinations and finally restaurants and franchise Finance with a majority of the exposures strong Nash Branch quick-serve industry. We also added a number of pages in the appendix of the presentation to provide additional information on some of our portfolios in class collateral back portfolios cash flow loan portfolio and are relatively
Are collateral backed loan portfolio includes loads Bates Financial sponsors that are secured by stroke collateral with LTV as of the end of the year and the 50 to 60% area off these include commercial airlines exposure, which is primarily the financial sponsors and backed by commercial aircraft least two strong quality Airlines and our Maritime closer, which is too well Diversified mainstream ocean-going assets and primarily with long-term contracts. We have no exposure to cruise lines.
We also added a page to describe our cash flow loads, which we reduced to about 10% of our loan at least exposure in the transformation.
And finally, we included some additional disclosure on our rail Fleet the Highlight the diversification of our Fleet by both car account and net investment.
We were watching all these sectors closely and applying sector-specific stresses on cash flows analyzing collateral and staying in close communication with our clients as a monitor the vulnerabilities within the portfolio and with that I will turn the call back over to Ellen. Thanks John mentioned. These are unprecedented times and I'm confident that we have the resources expertise and rigor to continue to navigate this environment with diligence. And Care CIT of today is completely different than the company that went through the last economic disruption took our national bank with diverse and stable sources of funding we have strong liquidity levels and robust risk management practices.
We will continue to focus on ensuring we have ample capital and liquidity to whether this environment and believe the strength of our balance sheet gives us a stabilizing Force Through the spell until. Thursday. We're also focused on pursuing opportunities where we see them in the HOA banking channel, in other areas of the commercial segment that could align to our stress. We remain steadfast and doing the right thing for employees customers communities and shareholders and with that we're having to take your questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to the first question today comes from most of Credit Suisse, please go ahead great. Thanks. I I guess I saw the disclosure there in the discussion about the performance and the reserve needs in the severely adverse scenario. I'm wondering if you can talk about wage there are portfolios that you think would perform potentially less bad than in the severely adverse and and ones that could perform worse than that given what you know today about, you know about current about current debt effects and trends.
You know what most of we have Marissa?
Horny our credit officer on the line. I'm going to turn that one over to Marissa. Thanks. Thanks, Allan. Good morning less bad and Morgan are relative terms obviously in the current environment. I think that less bad is going to be more dictated by duration that the necessarily a specific industry. We have a pretty broad-based middle-market business. We also have technology businesses and jobs and renewable energy that I think I would put on the on The Greener Side of being more positive in the current environment and as Ellen identified and John identified. I think that obviously with oil falling into negative territory, I think oil and gas which we have about five hundred fifty million of EMP exposure and that's disclosed in the club.
No, material is clearly something we need to watch closely and then there's a very unpredictable environment going on in retail, which will be dictated by by again the duration of the governor the US government keeping us closed. I think that as I would also indicated, you know, fifty percent of our portfolio in in our factor in retail is an investment-grade companies and I cracked up to be not as impacted.
Okay, thanks. Maybe as a you know, as a follow-up John you talked a bit about the rail portfolio and you know talked about potential for higher costs as you, you know, kind of do some repositioning and potentially maybe is there a way to kind of think about the impact of that on that Finance revenues we go forward with yeah. Well it look as a starting point. I think obviously we withdrew guidance as I think most banks did I think there's just not a lot of visibility. I think most of what I sat with you want stage back in the end of February at the price. We start brunch know we talked about, you know, um utilization maybe going down at 92% and then starting to bounce back a little bit around the rest of the year. You've got 24% in with American Fleet is still part and storage and that seems to be increasing if you just look at and don't usually do this, but we re loadings.
Um or reflecting the economy Autos down 67% week on week. And obviously we're like that obviously, but we're light in auto tracks chemicals in petroleum or down 7% we go week that's likely to continue with the glut of oil in the in the bright spots were in agriculture and and paper products. And so um, it's tough. I think our guidance is is that you know, expect that real utilization could go into the mid-eighties and mid-to-high eighties from where we're at right now. And then the fact that you've got the incremental cost as utilization declines of the storage of more cars going into the store. It's so it's it's just going to be challenging I think about like everything else it's going to be tied largely to the pace of the recovery and what kind of recovery we start to see in terms of whether it's u-shaped or v-shaped if it's a V shape wage.
covering you
You know, you might expect these trials to reverse fairly quickly. If it's other than that, you could be protracted much longer, but it's clearly going to have an adverse impact on net financial and forward. Yeah, but I also want to add that there's a lot of things that we're doing about. This one is just rigorous, of course folio management, you know, we have received some requests for lease restructuring a rental release and where you are addressing these on a case-by-case basis. We are looking for opportunities to repurpose and cards. We're also working on continuing to drive down maintenance costs and we have a lot of initiatives going there including managing our repair process increasing the use of mobile repair units. And so this has, you know allowed us to offset. The pricing Trends a little bit and then you know as John mentioned in his script before that other strategies about selling older cars as a game.
We'll probably expect lower gains over the next quarter. But I do want to leave everybody with the thought that we should remember that rail cars or long-lived assets and their performance should be reviewed over cycle. Just a point in time.
Alan John and Marissa. Thanks. Good luck. Thank you.
The next question today comes from Eric Wasserstrom of UBS, please go ahead.
But thank you continue hear me. All right. Yes we can. All right. Great. Thanks movie just to start. Could you recall what economic Outlook is your is your base case scenario for you know for whatever your Verizon is at this point.
Yeah, so I think the easiest way to describe it the way I think about it is it's kind of a scenario cocktail and we use three months areas. We had an updated Baseline pandemic scenario from Moody's on March 20th, which was our Baseline we and that's when we kind of snap line in terms of preparation for order and we had the more volatile v-shaped that scenario which had a deeper cut into June the second quarter and more spontaneous recovery into the third quarter and then we leveraged another stereo, which we label as S3, which is a severely the first area and so, just to kind of give you some context in terms of the different scenarios in terms of GDP. If you look on our Baseline and had GDP down 5% off.
And then moderating in the third quarter it down just 0.3% If you looked at the more volatile v-shaped scenario you had uh GDP in the second quarter down 20% but recovering 11% in the third quarter and then in the severely adverse scenario that we also kind of applied as an overlay gas base case you had GDP down 5% in the second quarter and then down another almost 3% of the third quarter. And so, you know, that's it's a little bit of out to me in terms of pulling all the numbers together and I think if you look at a new Baseline Thursday, I guess Moody's is provided on April 10th in Port ends that you know, again, it's another key shape recovery, but in the second quarter, you'd have Jeep he declined by 30% off.
third quarter past seven
15% So I mean that's kind of, you know, the thoughts around the way we kind of managed through the process. I think obviously we're going to continue to monitor the scenarios our own portfolios in terms of real experience from the capacity of the government programs to provide some level of recovering I'm going into the economy and I think we'll have better sense of this and and more refinement as we get into June the second quarter, but it's obviously very fluid.
Great. Thank you for that. And and so that was where the preface to what is my my real question which is if we think about you know, the the warm abilities as being in that category around Revenue around operating expense and around provision. If you were to move let's say from that Central scenario to the to the S3 scenario, where would be Bell Mobility be most acute give you know relative to your financial position today more on the revenue side or potentially more on the provision side. I think it's clearly more on a Thursday. So on the revenue side, I mean we're at zero rates. I mean, we're already kind of feeling that challenge and it's starting to feed through in March. I mean, if you look at the first quarter January and February actually quite good month for us and even halfway into March we were fine, you know part of this is in part of the way we're thinking about forecasting in it, and it's very difficult because it remains very fluid dead.
Is that you could almost run rate March into the second quarter and absent we wouldn't expect that. We're going to take another $4 million dollars charge in obviously Google's behind us now, but right away anymore and in having potentially some incremental element of provision, I think is is really the the challenge, um, in terms of what we're going to face going to go-forward. Basis is the provision. Yeah, I would just add that, you know on the expense side, you know, we're we're on top of our cost reductions. Um, we we had the fifty million in that cost reductions for 2021 over and above the 16 million in the cloth seats from YouTube, So we feel more in track and we actually believe there's more opportunities there on the expense side of the business and I think you know, we do see some dead.
Potential opportunities on the revenue side of the business going into the pandemic. We had a really good quarter in capital markets with organian. Peace were up like 25% We we we're having very good momentum on the deposit side of the business. In fact, when you looked at the defensive touchdowns from the commercial business we were able to keep a third of those deposits now for company like CIT, which really, you know, I think that's been a really big accomplishment for CIT to do that. It really shows our strategy of trying to expand customer relationship and focus on the on on deposits and I think that you know, our strengths in our industry expertise is going to position us well for a lot of the restructures going on in the market and and restructuring activity in business Capital One dog
Right spots has been technology least.
Things because of the trend of you know schooling at home and working at home. We've had really good volumes in technology and I think one of the first places we're going to recover home in construction, which will also bare well for the business, so we do see some bright spots here coming out of it.
Thanks very much for taking my question.
My next question today comes from Chris kotowski of Oppenheimer & Company, please go ahead.
Yeah, good morning. You know I guess my question is, you know, the durability over all the durability of your pre-provision net revenues month and I guess looking at the rail and leasing business there, you know, you mentioned the utilization rates coming down and and increased maintenance costs and all that. But you know, when we see, you know, if you look at it linked quarter the net net lease revenues went from like $98 billion to $78 billion. I mean how much of that impact have we seen them? Cuz I mean it it's it just seems like we would have only had like, you know a couple of weeks of the impact in in 1 Q. So should we be expecting another meaningful drop in that net lease revenue or is can you size that for us in any way?
Yeah, of course. It's showing it had probably be sized just because it's it's a function of I guess the recovery. I guess what I would say, well it really depends. So in any given quarter, you'll have between four or five hundred six thousand cars that are renewing and it fundamentally depends on what kind of cars are renewing. Um, that's pretty impact. Obviously the renewal rates going forward and so it's all tied back to back.
You know the the the recovery or the pace of the kind of recovery. We still we saw it clearly. We weren't anticipating utilization Going Down To Georgia, you know, ninety 1% or 9.7% in this quarter if we see a v-shaped recovery that could bounce back pretty quickly, especially if the economy starts to come online people are going back to work the social distancing protocols all start to Abate any economy gets back online, but it absent in economy. It's it's not clear what you're actually shipping and so it's all interrelated and I'm sorry, I can't give you a better answer but there is no clear answer.
Okay. All right. That's it for me. Thank you.
Again, if you have a question, please press * then 1 the next question today comes from of City, please go ahead.
Looking at the the coded.
Mercy you want to take that one sure. I think that the again these are not equal and severity as as we mentioned out of the factory receivables a considerable portion of that is investment-grade. So it is we're not anticipating that that's going to result in any material issues for us wage. When you when you look at the oil and gas number. I know you're running your finger down that that left-hand column only about half of that is is actually exposed in the EMP actor and we believe that our customers are hedged 75% this year and 50% into next year at considerably higher level of oil prices. Although I guess anything is considerably higher than negative, but they're they're uh in many cases over $50 a barrel. The real estate is collateralized with with good place.
I'm with strong sponsors and we so we're negotiating those individually. We we really focus on strong Partners on the construction side and on the off the management side and you know again for things like hotels and lodging duration is going to be key. Our senior living exposure is pretty Diversified and and obviously collateralized as well and the gaming again duration on the gaming side in the last in the last downturn Regional gaming actually with much more resilient than tourist based gaming although every cycle is different. And so this is really about making sure that these companies have sufficient liquidity to whether whether through to an opening and then in our franchise Finance business, which is relatively small, um, the quick-serve in dog
The fast food industry is actually a little bit more resilient than casual certainly more than casual dining because they have it's a lot easier for them to do take out and drive through. So again, the severity levels are just different and they're taking on a case-by-case basis and I think as I said before duration is key.
Okay, I appreciate that. That's helpful. Maybe we could just take a little bit more on to the factoring side cuz I think this is an area where people don't have a deep understanding of the risks associated with those and those are obviously have large numbers when you just look at the total receivables that you have in that business and understanding that, you know, you have you know, a strong counterpart on half of the book in, you know, maybe just talk about the the other part of the book the smaller customers you have there what the credit risk of this month? Okay. Is it more of a credit issue or is it more of a fact the fact of the you need actually just lose a significant amount of volume here from from retailers that may be struggling.
Well, I'll take I'll take the credit question. The remainder of the book is spread out over about 25,000 individual retail customer and these are customers of our clients and we've been monitoring this portfolio very aggressively since well for a long time, but in particular since 2016 when it was clear that there was a secular issue in bricks-and-mortar retail. And so we've been taking considerable actions where we could offer was available to us to commit to get the risk that we had either through cash collateral letters of credit and also other techniques that we have in terms of how we would manage those receivables in the context of our client exposures. And so we've done a considerable amount of work to reduce lines lines under which we purchased Factory.
Available and as I said engage in other risk mitigating techniques, uh, our exposures are are short-term their trade receivable typically off a must someone is in liquidation. We would expect that they would want to protect their Trade Credit. And so and we've been monitoring retailers in terms of the ones that I thought had the survivability way before this week. So we entered this this crisis in in good shape. But as I said, it's it's extremely unpredictable. It's going to be driven a duration.
But you know seven out of ten of our top ten client issued in the capital markets in the last several months. So the markets are open to the industry, right? Yeah, and I I just want to add that we're in daily contact with our factoring clients providing them a lot of expertise and advice during this period and you know one is that China factories are back open. They're running like at 80% we have observed that certain of our customers are gathering liquidity and anticipation of reopening which really could you know pretend their intention to Meet vendor obligations. We also have exposure to certain retailers Who Remain open a such as the discount and online stores, but you know, it's an evolving situation and we're continuing to work closely with them navigating with with them during this time.
And the only thing I would add is just to be really clear as we do expect it back for information to be down in the second quarter. I mean, this is just fly challenge as well as the demand challenge retailers have to start opening and shipment off start have to start coming in from not just trying to put around the world. So a lot has to happen for us to get back and standing
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Great. Thank you, Alyssa. And thank you everyone for joining this morning. If you have any follow-up questions, please feel free to contact the investor relations team or contact information is on the website. Thank you again for your time. Stay safe and healthy and have a great day at a conference is now concluded. Thank you for attending today's presentation. You may now disconnect.