- Ted MannThe Wall Street JournalCANCEL
Updated March 11, 2015 3:37 p.m. ET
is considering making deeper cuts in its massive banking business, having decided the returns from lending are no longer worth the ire it provokes among investors, people familiar with the matter said.
The shift in thinking is subtle but important. While the company has long committed to shrinking GE Capital in the wake of the financial crisis, it has also 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 sees the bulk of the lending operation as severable, the people said—similar to how the company viewed its appliances business, which GE agreed to sell to Sweden’s
AB last year.
GE has made clear it will hold on to functions like aircraft leasing and energy and health care financing, which support its industrial operations. But it has come to see big business lines like commercial lending as dispensable if it can secure permission from regulators and the right price, the people said.
The reassessment comes as 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 under $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 businesses.
“GE Capital must enhance our industrial competitiveness, not detract from it,” Mr. Immelt says in a letter to shareholders that will 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 involves supplying credit to “middle market” companies like Midwestern grocery store chains and Wendy’s 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.
Aggressive moves to further shrink GE Capital could take time. GE decided appliances didn’t fit with the company in the middle of the last decade, but it was forced to hold on to the unit for years after the financial crisis disrupted efforts to sell it.
Efforts to pare down GE Capital are similarly 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 fails, and GE is a key source of support.
A year ago in his annual letter to shareholders, Mr. Immelt called GE Capital “a valuable middle-market franchise that builds on GE strengths and our domain expertise.”
Agence France-Presse/Getty Images
The thinking has changed in a large part because investors still think GE Capital is too large and because the business has come under a tougher regulatory regime, exposing the entire company to more strictures and worsening its returns.
At an investor conference in February, GE Chief Financial Officer
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 its ability to generate returns for GE.
“We will continue to look at the balance of the portfolio,” Mr. Bornstein said at the conference. “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 in GE Capital and nearly toppled GE, the company has been scaling it back aiming to make it safer and smaller by selling off billions of dollars of assets from commercial real estate to international banks.
The company 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 will spin off the rest of the company to its shareholders later this year.
Mr. Immelt 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 a systemically important financial institution. That means GE must keep more capital in its finance arm and can no longer pull out as much cash after long relying on it to help pay dividends, buy back shares and finance its 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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