The General Electric Company (GE - Free GE Stock Report) appears to be exploring the possibility of selling off big or small parts of its lending business, GE Capital. Management is already shedding assets tied to real estate (commercial real estate in particular), and the business has not pursued any growth initiatives in this arena. That said, we surmise that the consumer-finance portfolio, like private label-credit cards and showroom financing, may be next on the chopping block. These cuts could reduce the size of GE Capital’s total loan portfolio by another 15% or so.
The financial crisis that took hold in 2009 hit GE Capital hard. Access to cheap funds dried up, and the unit had to get an emergency infusion from Warren Buffet and was forced to lean on Uncle Sam. Since the financial crisis, however, top brass has been actively working to reduce the size and scope of GE Capital by selling off small chunks of the business and by merely allowing the loan portfolio to shrink over time. For example, GE Capital recently agreed to divest Business Property Lending for $2.51 billion in cash, which includes $2.44 billion of performing commercial loans. In addition, the conglomerate has restructured the unit and has switched the lending arm’s attention to originating risk-averse corporate loans. The thinking behind the move is that GE Capital would be better and more able to operate as a stand-alone company if it were smaller.
Presently, GE Capital is having its best run in decades, and now accounts for about half of GE’s profits. Even the once struggling commercial real estate group is profitable again. Still, despite GE Capital’s big strides, investors do not appear to be impressed. GE shares have been stuck in neutral for some time, since Wall Street seems to be placing more emphasis on the company’s industrial businesses. In addition, many investors are passing on the “free lunch” associated with diversification efforts, and looking for GE to de-emphasize its lending business and bulk up its industrial businesses. Finally, there are significant risks in the financial sector, especially given the likelihood of tougher regulation in the consumer finance space on the horizon.
As a result, it seems the time has come for management to decide whether or not to move further in its quest to shrink GE Capital. Top brass has already said that it has no desire to completely sell off GE Capital, due to the fact that the business affords the parent substantial tax breaks and helps the conglomerate fund deals elsewhere, including in aerospace and energy. In fact, the subsidiary and the parent are joined at the hip—GE uses its industrial segments to send business to GE Capital, and vice versa. Moreover, we do not expect there would be much of a market for some of the unit’s business lines, including the aircraft leasing arm. There could be some interest in more of the real estate-based businesses, due to the generally depressed property market, but GE Capital would probably be best served waiting until market conditions are more attractive.
Given that the consumer finance sector that GE Capital currently operates in is becoming a difficult place to hang one’s hat, it seems that slicing off these parts would be management’s most obvious course of action (if leadership decides to act, that is). Further cuts to the real estate portfolio also seem likely. That said, GE Capital has become much less reliant on its parent over the past few years and would probably be able to fund itself as a stand-alone company, which gives the board lots of flexibility.
At the time of this article’s writing the author did not have positions in any of the companies mentioned.