GE Capital is ‘Weathering the Financial Storm’
Editor’s Note: The following story was written by Bob Sechler and was published by The Wall Street Journal.
GE Capital nearly sank General Electric Co. during the financial crisis. The unit faces an uncertain regulatory future and has almost nothing to do with the conglomerate’s other businesses. And Chief Executive Jeff Immelt is standing by the business.
Mr. Immelt acknowledges that he let the lending operation grow too large, calling that lapse the biggest regret of his 10 years as CEO. He also says many investors, including some big ones, would rather the company get rid of the operation.
But he believes GE can make lots of money from a safer GE Capital, focused on business loans to midsize companies, and he’s willing to let the unit account for as much as 40% of GE’s profit. That disagreement, he says, is the main factor holding back GE’s stock.
“I think it is rediscovering with investors the value of financial services,” Mr. Immelt says when asked what it will take to get the company’s share price rising again. “We obviously think it is worth more than they do right now. I think that is only going to come with time.”
GE Capital, which accounted for about a third of the parent company’s revenue last year, is a significant lender in its own right. The unit’s $606 billion in assets make it bigger than all but seven U.S. banks, and it dwarfs the lending arms at other industrial companies, such as Caterpillar Inc., whose financial-services unit has $30 billion in assets.
GE Capital relies on the financial markets rather than deposits to fund its loans. When that funding started to dry up during the financial crisis, GE lost its triple-A credit rating, saw its stock fall below $6 and had to slash its dividend.
The finance unit now is on significantly firmer, longer-term footing—thanks in part to paring back its reliance on short-term borrowing—and problem loans have been contained. But in a sign the crisis isn’t fully in the past, the U.S. regulator for mortgage giants Fannie Mae and Freddie Mac sued GE and 16 other big lenders Friday aiming to recoup billions of dollars in losses on soured mortgage loans.
“There’s a negative attitude toward financial stocks,” says Eric Boyce, a fund manager at Hester Capital Management in Austin, Texas, which owns GE stock. “That’s an anchor.”
While many industrial companies have set up so-called captive-finance units to help customers buy the companies’ goods and services, GE jumped into lending for its own sake. Less than 5% of GE Capital’s loans are made to help companies buy the conglomerate’s products. The unit puts the bulk of its effort into areas that include consumer finance, aircraft leasing and lending to midsize businesses.
The unit has been downsizing and sharpening its focus since the financial crisis. It has stepped back from real estate, where GE Capital had been among the world’s largest property investors, and sold off consumer-finance operations in the emerging markets of eastern Europe and Latin America. A key sign of progress should come next year, Mr. Immelt says, when he expects GE Capital to resume paying a dividend to GE proper.
Now GE has to convince investors that it has the finance unit under control and that the investment is worthwhile, Chief Financial Officer Keith Sherin says.
GE also has to navigate a new regulatory framework. Oversight of GE Capital in July shifted to the Federal Reserve, which is expected to be more demanding than the unit’s previous regulator, the Office of Thrift Supervision, which was dissolved in the wake of the financial crisis.
“We have weathered the storm as well as anybody and we are well positioned to come out the other side,” Mr. Immelt says. “Investors are going to have to triangulate what they think that set of financial-service earnings are worth.”