General Electric (NYSE:GE) recently announced plans to divest its North American retail financing business in a bid to focus on its industrial and core mid-market financing businesses. Early next year, the company will file for an IPO for this business that could be valued at over $20 billion, according to estimates.  In our opinion, this move will allow GE to not only increase focus on its core businesses, but also limit the impact from potential future shocks in the financial industry.
During the financial crisis of 2008-09, many individual and commercial customers defaulted on their loan and lease payments, which impacted earnings at GE Capital. Additionally, as GE Capital made up more than half of GE’s total earnings, the impact from the financial crisis on the company was severe. The company’s stock price fell to single digits and it was forced to cut its dividend. In the aftermath of the financial crisis, to reduce dependence on the financial industry, GE steadily reduced the size of GE Capital by exiting from non-core assets such as equity-based real estate investments. We figure that the divestiture of the North American retail lending business is the last major restructuring at GE Capital, which will reduce the financial arm’s share in GE’s earnings mix to around 30%.  GE’s retail lending business primarily provides store credit cards and financing for sales on credit.
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We currently have a stock price estimate of $26.67 for GE, marginally below its current market price.
GE Capital’s Shrinking Size Driven By Non-core Exits
GE Capital’s ending net investment (ENI) excluding cash, which provides a measure of its asset size, declined from $556 billion at the end of 2008 to $385 billion at the end of the third quarter.   This significant decline in GE Capital’s size over the last few years was driven by its exit from non-core and under-performing assets. During this time period, the company divested a number of its non-strategic financial businesses that included marine container leasing, Garanti Bank, retail lending businesses in Singapore and Canada, and consumer home lending businesses in Australia and New Zealand.
However, over this period, profits from GE Capital rose steadily from $1.3 billion in 2009 to $7.4 billion in 2012, supported by a recovery in the global economy, particularly in financial markets.  In the current year, earnings from GE Capital were up 3% annually to $5.7 billion in the first three quarters, and the company anticipates earnings from GE Capital to continue to rise in the fourth quarter.  However, GE Capital’s earnings will likely fall next year due to the divestiture of the North American retail lending business.
In all, this divestiture will enable GE to reduce the size of GE Capital to $300-350 billion ENI and increase the share of the industrial business to around 70% in its earnings mix.  In doing so, GE will be more focused on its industrial business and less vulnerable to future downturns in the financial industry.
GE Capital Will Increase Focus On Lending To The Middle Market And Selected Verticals
Post exit from the North American retail financing business, lending to mid-size companies that include food franchises, manufacturers, distributors and retailers which generally do not get a lot of attention from big banks, will constitute the bulk of GE’s financial business. Currently, around 40% of GE Capital’s assets are composed of such commercial loans and leases. 
In addition to mid-market financing, GE Capital will also focus on growing its financing in verticals that are linked to its industrial businesses. This means GE’s lending to aviation, wind power and gas-based energy generation sectors could increase in the coming years. Such lending will also be relatively more stable as GE possesses deep knowledge in these verticals. Thus, GE Capital’s business and growth will get more aligned with GE’s industrial business and growth.Notes:
- GE financial services unit may be valued at more than $20 bn in IPO, November 15 2013, www.ft.com [↩]
- GE Capital’s investor meet presentation, November 15 2013, www.ge.com [↩] [↩] [↩] [↩]
- GE Capital investor meet presentation supplemental information, November 15 2013, www.ge.com [↩]
- GE Capital at Bernstein strategic decisions conference, May 31 2013, www.ge.com [↩] [↩]