- Ted MannThe Wall Street JournalCANCEL
Updated March 11, 2015 7:55 p.m. ET
General Electric Co. is considering making deeper cuts in its massive banking business, deciding that the company’s returns from lending aren’t worth the discontent the business causes among GE’s investors, according to people familiar with the matter.
That assessment marks a subtle, but important, shift in GE’s thinking.
While the company has committed to shrinking GE Capital in the wake of the financial crisis, it has viewed a smaller, safer banking business as an integral part of a conglomerate better known for its jet engines, power turbines and CT scanners.
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Now, GE regards the bulk of the lending operation as expendable, the people said, much the way the company viewed its appliances business, which it agreed to sell to Sweden’s Electrolux AB last year.
GE has made clear it plans to continue such pursuits as aircraft leasing and energy and health-care financing, which support its industrial operations.
But the company has come to consider major business lines, such as commercial lending, disposable if it can secure permission from regulators and the right price, the people said.
Chief Executive Jeff Immelt is under pressure to remake GE as a more-focused industrial company and win over investors weary of a stock price that has been stuck below $30 since the financial crisis.
Shareholders continue to penalize the company for what they perceive as a risky finance business, and GE’s stock has underperformed some of its industrial peers that don’t have big lending operations.
On Wednesday, GE’s shares rose fractionally in New York trading to $25.19.
“GE Capital must enhance our industrial competitiveness, not detract from it,” Mr. Immelt says in a letter to shareholders set to be published Monday with the company’s annual report. “We see a significant advantage in our ability to bring financial solutions to industries like aviation, energy and health care. But make no mistake, the ultimate size of GE Capital will be based on competitiveness, returns and the impact of regulation on the company.”
GE’s commercial lending and leasing business supplies credit to “middle market” companies, such as Midwestern grocery-store chains and Wendy’s restaurant franchisees.
Scaling it back would mean sacrificing a big profit driver to ease investors’ concerns. Commercial lending and leasing generated $2.3 billion in profit last year and accounted for $110 billion of GE Capital’s year-end total of $237 billion in loans.
Aggressively shrinking GE Capital could take time. GE decided appliances weren’t a good fit for the company in the middle of the past decade, but it was forced to hold on to the business for years after the financial crisis disrupted efforts to sell it.
Efforts to pare down GE Capital would likewise be subject to outside forces.
Regulators consider the unit—by itself the country’s seventh-largest bank—big enough to threaten the financial system if it failed, and GE is a key source of support for it.
In his annual letter to shareholders a year ago, Mr. Immelt called GE Capital “a valuable middle-market franchise that builds on GE strengths and our domain expertise.”
Agence France-Presse/Getty Images
That perspective has changed largely because investors still think GE Capital is too large and because the business has come under a tougher regulatory framework, exposing the entire company to more strictures and worsening its returns.
GE has $83 billion invested in GE Capital. Last year, it got back $3 billion in dividends, while the unit’s earnings fell 12% to $7 billion. This year GE expects to get $2 billion to $3 billion.
At an investor conference in February, GE Chief Financial Officer Jeff Bornstein said investors remain concerned about the lending business and are asking about its proper size, GE’s options for shrinking it and how new bank regulations affect the business’s ability to generate returns. “We will continue to look at the balance of the portfolio,” Mr. Bornstein said. “A lot of this is going to play out in the next couple of years. We’re focused on being small.”
Ever since the financial crisis exposed the risks behind GE Capital and nearly toppled GE, the company has been scaling the unit back, selling off billions of dollars of assets from commercial real estate to international banks.
The company has identified $130 billion in “red assets,” a package of unwanted investments in office buildings and loans that it plans to sell off.
It also made a big move to shrink GE Capital last year with a two-step plan to spin off its private-label credit cards and store credit plans into a separate company called Synchrony Financial. GE sold shares in Synchrony to the public in July and plans to spin off the rest of the company later this year.
Mr. Immelt, GE’s CEO, has said he aims to reduce GE Capital’s share of the broader company’s profit to 25% in 2016 from 42% last year and more than 50% before the financial crisis.
Regulators have deemed GE Capital an important link in the nation’s financial system. That means GE must keep more capital in its finance arm and can no longer pull as much cash out of it, after long relying on the business to help pay dividends, buy back shares and finance GE’s industrial operations.
“We’ve just got to be laserlike focused on those things that, in the regulatory world we live in today, that we can stay in and generate a return on capital that makes sense for you all,” Mr. Bornstein told investors in February.
Write to Ted Mann at firstname.lastname@example.org
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