GE Capital is to scale back its
consumer finance operations and focus on what it believes is the
untapped potential of its deposit-gathering abilities. That will
involve leveraging the strengths of its diverse banking network via
the newly-created GE Global Banking division. Dan Jones

GE-consumer mortgage assets by countryIn a financial services investor meeting on 2
December, GE Capital said it is now forecasting net income of $9
billion for 2008, a figure at the low end of previous earnings
guidance. Management added that it forecasts 2009 net profit of $5
billion for the struggling unit.

Fourth-quarter figures for parent company GE, which reports on
23 January 2009, will include an after-tax charge of between $1
billion and $1.4 billion, 70 percent of which will relate to GE
Capital, as a result of additional losses, reserve building and a
restructuring necessitated by the scaling back of financial
operations. That restructuring will include an emphasis on raising
deposits, a strategy which has become familiar territory for
financial services firms over the past 12 months as the industry
turns away from the wholesale funding models which have come
unstuck during the credit crisis.

The need for more low-cost funding sources has led Morgan
Stanley, Goldman Sachs and American Express to convert into bank
holding companies in recent months, but GE Capital says it will not
become the next bastion of corporate America to follow suit. But a
spokesman told RBI the creation of a newly-formed GE
Global Banking group “speaks volumes” about the firm’s

“We are going to put a lot of focus and effort into our existing
global banks and bank partnerships, and are looking to become
universal banks in key selected markets – Poland, Hungary and the
Czech Republic in particular.”

All three markets have scope for growth: in Poland, for example,
GE Money Bank is to merge with the recently acquired Bank BPH with
the aim of achieving a top five market position in the country, a
goal which will prompt the combined group’s network of 312 branches
across Poland rise to 530 by 2010. In Hungary, GE’s Budapest Bank
is currently the country’s eighth largest bank by assets; in the
Czech Republic GE Money Bank is the seventh largest by the same

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GE will also look to markets such as Turkey, where it owns 20
percent of Garanti Bank, and Thailand, where it has a 35 percent
stake in Bank of Ayudhya, the country’s fifth largest bank by
assets, the spokesman said.

“Only about 20 percent of our funding needs come from deposits
today in [consumer] businesses. We have increased the emphasis on
this in all of our deposit-taking institutions and expect that
ratio to exceed 50 percent by the end of 2010,” said GE Capital
chief operating officer Bill Cary, speaking at the investor

“While that sounds like a big number, we are talking about
modest share gains in markets where we have got a branch presence
of over 900 branches and small share gains in markets where we’ll
tap deposits through wholesale channels.”

The latest attempt to get to grips with GE’s labyrinthine
structure has resulted in the creation of three divisions which
make up GE Capital: GE Capital Finance, which the group sees as its
core business; GE Global Banking, which combines GE’s wholly-owned
banks with its banking joint ventures; and a series of business
lines which are to be sold or run off.

GE Capital itself was formed in a separate restructuring this
July, via the aggregation of the firm’s consumer and commercial
finance operations such as GE Money and GE Commercial Finance.

Most of GE’s mortgage book to be run off

The business lines to be run-off include “most of our consumer
mortgage books, and a dozen small or subscale commercial and
consumer platforms”, Cary told investors.

Unsurprisingly, GE is most concerned about its consumer
portfolios in the US and the UK – UK mortgage origination has been
reduced by 60 percent in 2008 and will total less than $1 billion
in 2009.

In the US, where GE Capital has $54 billion in served assets –
$32 billion via private label credit card finance and $22 billion
from sales finance – the firm believes unemployment will reach 8.5
percent by end-2009, a statistic which would result in $4 billion
in pre-tax losses in 2009. This would rise by another $800 million
should unemployment reach 9 percent in 12 months’ time. Scope for a
still greater downside remains: the current unemployment rate rose
to 6.7 percent on 5 December following figures which were far worse
than consensus expectations.

Cary maintained that “the balance of the consumer businesses
have actually performed pretty well”. That, however, has not
precluded the firm from exiting a number of markets over the past
few months. GE exited its US mortgage business, WMC, in December
2007, its Canadian business in July 2008 and is in the process of
selling its Australia and New Zealand business, Wizard, along with
liquidating the remainder of its portfolio in the region.

Wider consumer finance offerings have also been streamlined in
2008: in March the firm sold its GE Money businesses in Germany,
Finland and Austria, as well as its UK cards operations, to
Santander (see RBI 589), while in July GE Money agreed to
sell its Japanese consumer finance operation to Shinsei Bank
(see RBI 596). The GE spokesman told RBI such
moves were less indicative of a concerted shift from consumer
finance to universal banking than they were of a renewed focus on
markets in which the company has room to manoeuvre.

“Where we have core scale in consumer finance – places like
Australia – we will continue to invest and grow. But the markets we
are exiting do not have the ability to get the kind of scale we
need for long-term assets and growth,” he added.