General Electric is best known as an industrial powerhouse, with manufacturing prowess in businesses that range from giant generators to...
General Electric is best known as an industrial powerhouse, with manufacturing prowess in businesses that range from giant generators to Boeing jet engines to alternative-energy technologies like windmills and solar panels.
Yet GE is as much a bank as a blue-chip industrial company. Half of its profits come from its finance arm, GE Capital, whose global portfolio spans aircraft leasing, commercial real-estate lending, credit cards and home mortgages.
Indeed, GE is the largest nonbank finance company in the United States, with assets of $696 billion and $545 billion in debt. If it were a bank, GE Capital would be the nation’s fifth-largest.
So the company found itself engulfed last week in the market turmoil. At one point Thursday, GE shares were down 20 percent for the week, before they revived to $26.62 a share Friday, down just 0.5 percent from Monday.
Most Read Business Stories
- The penthouse atop Smith Tower is on the rental market for the first time
- Downtowns will be back, but Seattle has choices to make
- Washington state ‘literally failed workers,’ and fixing the unemployment system won't be easy
- Boutique cruise line Windstar will move its Seattle headquarters to Miami
- J&J’s 1-dose shot cleared, giving US 3rd COVID-19 vaccine
Perhaps more telling, the cost to insure the debt of GE Capital, with so-called credit default swaps, had more than doubled by Wednesday. The insurance cost had dropped by Friday, though it remained well above the level of a week earlier.
Given the continuing uncertainty in the financial markets, GE is likely to be under pressure. In a report Thursday, the independent credit rating agency Egan-Jones concluded, “With the tsunami sweeping over the financial sector, it is unrealistic to expect that GE will not get wet.”
GE, according to analysts and institutional investors, will not face the huge write-downs of financial asset values that sets off a liquidity crisis because it does not have large holdings of exotic securities and is conservatively managed.
GE also has far less debt than most banks, giving it more financial ballast and flexibility in difficult times.
But the financial crisis, analysts say, does present GE with challenges to its financial performance, its strategy and perhaps even its business model of using stable profits from the finance unit to cushion the company from up-and-down cycles in industrial sales.
The upheaval also makes it more difficult for GE to pare some of its holdings, like NBC Universal and the credit-card operations, and make itself less reliant on the financial sector.
In general, analysts share the self-assessment offered this week by the president of GE Capital, Michael A. Neal. “We’re a very conservative finance company and not a Wall Street wannabe,” Neal said.
The outlook for the current quarter is uncertain. GE had already startled Wall Street with lower-than-expected earnings in the first quarter, when the markets seized up with the collapse of Bear Stearns.
Some analysts retooled their financial models last week and now estimate that GE Capital’s earnings in 2009 will decline 5 percent to 15 percent, compared with previous projections that the finance unit’s profit would hold steady.
The financial turmoil, they say, also poses a threat to the pace of the strategy of GE CEO Jeffrey R. Immelt, to simplify the sprawling company and reduce its reliance on the finance business.
The plan is to trim the contribution from finance to about 40 percent, while tilting more toward supplying equipment for what it calls “infrastructure” industries like transportation and energy, as well as health care.
“Immelt wants financial services to evolve into a cash cow, and the infrastructure and technology businesses to be the growth engines of the company,” said Noel M. Tichy, a professor at the University of Michigan Business School.
Sell-offs intended to accelerate the strategy will be more difficult in a time of credit-crimped economic weakness. GE, for example, has said it wants to sell off its consumer-appliance unit. But with housing in a slump, potential buyers are likely to be scarce.
Similarly, the company wants to sell its private-label credit-card business in North America, where GE handles credit cards for companies like Wal-Mart Stores, Ikea, Brooks Brothers, Dillard’s and Lowe’s. Though profitable, it’s more difficult to sell at an attractive price as consumer spending falls and delinquencies rise.
Most analysts expect GE will eventually sell NBC Universal, but not before it can reduce its dependence on GE Capital. So selling NBC Universal, analysts say, is probably a couple years down the road now.
GE did not avoid mortgage-lending woes in the United States altogether, but it recognized the problem early and got out. In 2004, it bought a subprime lender in California, WMC Mortgage. But GE grew alarmed by the risks and sold it off in 2007, taking a total loss of about $1 billion.
“That was a big mistake,” said Robert Spremulli, an analyst at the investment company TIAA-CREF, which owns GE shares. “But it wasn’t a disaster for GE.”
Nearly 100 percent of GE’s residential mortgages are outside the United States. A GE spokesman said the company had arranged a loan to insulate its exposure to the embattled American International Group, a big mortgage insurer.
GE’s commercial real-estate lending is mainly outside the United States, and the average loan is a conservative 68 percent of the value of the property.
GE’s finance business hinges on the company’s blue-chip Triple A rating from the big credit rating agencies, Standard & Poor’s and Moody’s. In a conference call with analysts in July, Keith S. Sherin, GE’s chief financial officer, said that maintaining the company’s top credit rating was the priority. “Everything we do is about making sure we keep it AAA,” he said.