Prior to the financial crisis of 2008-09, General Electric‘s (NYSE:GE) financial arm, GE Capital, used to raise money at low interest rates using GE’s then-AAA credit rating. It used revenue by lending out money at higher interest rates to a variety of customers. However, with the financial crisis, GE lost its AAA credit rating and along with that the cost of raising funds increased considerably for GE Capital. In addition, high levels of debt that issuance of commercial paper and bonds created for GE further undermined its profitability.

Through MetLife‘s (NYSE:MET) online bank deposits, which are worth approximately $7 billion, GE Capital receives a low cost source of funds, and this also reduces its dependence on debt for raising funds.^[1] For MetLife, the sale of its online bank deposits business allows it to get out of banking regulatory oversight and thereby raise dividends and share buy-back to match those of its competitors.

However, for the past several months, the deal between GE and MetLife has been pending approval at the Federal Deposit Insurance Corp (FDIC). And, as there was no decision on the deal at the regulator’s last meeting in early-September, GE and MetLife keenly changed terms of the deal to speed up regulatory approval and finally grant GE Capital a source of low cost funds for its operations.

We currently have a stock price estimate of $21.77 for GE, marginally lower than its current market price.

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The altered deal

Under the revised arrangement, MetLife’s online bank deposit business will be acquired by GE Capital Retail Bank instead of GE Capital Bank. As a result, the regulatory approval for this deal shifts from the FDIC to the Office of the Comptroller of the Currency. Accordingly, GE has withdrawn its application from the FDIC.

The FDIC held back clearance for the deal on questions regarding GE’s plans for the acquired unit. The FDIC was also concerned about the risks associated with raising funds over the Internet outside the traditional branch networks, considering that a large portion of MetLife’s bank deposits are raised online.

Benefits for GE and MetLife

Nonetheless, by acquiring the unit, GE will be able to reduce its dependence on short-term commercial papers and bonds for raising funds. GE has steadily reduced its short-term commercial paper borrowings from $105 billion in early-2008 to $43 billion at the end of Q2 2012. The company intends to reduce this eventually to $25 billion. And, MetLife’s online bank deposits, which are worth $7 billion, will provide GE Capital an alternate, low cost source of funds.^[2]

For MetLife, its bank deposits business constituted less than 2% of its total operating earnings in 2011.^[1] But, it prevented the bank from raising dividends and share buyback by qualifying it under capital adequacy norms for banks. The sale will thus free MetLife from these norms and allow it to return a larger share of its capital to shareholders and match that of its competitors.

Overall, the new altered agreement is expected to speed up regulatory approval and provide GE Capital access to low cost funds without increasing GE’s debt levels.

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