GE Capital sees '09 profit, but below December view

By Scott Malone

General Electric Co's hefty finance arm expects to be profitable this year even though the economy may drive its profit down, nearer to $2 billion to $2.5 billion than to a $5 billion figure it gave in December, a top GE executive said on Thursday.

The U.S. conglomerate calculated the lower projection using assumptions of the Federal Reserve for the U.S. economy.

Where we think we are right now is closer to the base case in terms of how the business is performing in this cycle, Michael Neal, chief executive officer of GE Capital, said at a special meeting the company called with investors and analysts to reassure them about GE Capital's health.

GE has stopped giving numeric per-share earnings forecasts, and officials declined to describe the $2.5 billion scenario as an update of the profit framework spelled out in December.

Even using the most adverse scenarios that it considers reasonable, the world's biggest maker of jet engines and electricity-producing turbines believes its finance arm would post break-even results this year, executives said.

GE officials contrasted its finance operations' tight standards and controls with practices at commercial banks. Commercial banks have been slammed by exposure to mortgage and consumer credit defaults, driving their stock prices down.

GE, the world's 12th-largest company by revenue in 2008 according to Fortune magazine, is viewed as a bellwether of the U.S. economy because of the breadth and reach of its operations and how widely its shares are held.

Investors have been intensely concerned this year that GE Capital, and particularly its real estate and consumer lending arms, could harbor a time bomb that would generate huge losses. Those worries have pounded GE shares down about 36 percent since the start of the year, a far deeper drop than the 16 percent slide of the Dow Jones industrial average. <.DJI>

GE shares closed down 19 cents, or 1.8 percent, at $10.13 on the New York Stock Exchange on Thursday, after rising 10 percent to $11.35, their best level since February 13. The cost of protecting GE Capital debt fell.

After the presentation, Jason Small, assistant portfolio manager with Chartwell Investment Partners, said: There were some areas where I think their projections are overly optimistic, but that's offset by other areas where I think they are being overly cautious. Chartwell, of Berwyn, Pennsylvania, owns GE shares.

I am still concerned about the UK mortgage business and some of the other non-U.S. consumer lending, but I can see that they have it contained, Small said, adding that he came away from the presentation confident that the problems of GE Capital would not pull down the core industrial business.

STRESS TESTING

The U.S. government has launched a stress test program that will assess banks' ability to cope with worse-than-expected financial conditions to determine how much additional capital banks may need.

Economists at the U.S. central bank have established a baseline scenario that calls for the U.S. economy to contract 2 percent this year, with a rebound in 2010, and assumes 8.4 percent unemployment. The Fed's adverse scenario is for 3.3 percent economic contraction and 8.9 percent unemployment.

GE Chief Financial Officer Keith Sherin said the company has run extensive stress tests on GE Capital's portfolio. It found that even in a worst-case scenario GE would not need to raise capital.

The Fairfield, Connecticut-based company plans to use some of its $60 billion in capacity left under the U.S. government-backed Temporary Liquidity Guarantee Program to pre-fund debt due to mature in 2010.

Unlike many banks, GE has no exposure to U.S. construction loans or U.S. mortgages, said Jeff Bornstein, GE Capital's chief financial officer.

Company officials noted GE does not use debt to fund most real estate investments and does not mark up the value of properties, so it has not written down the value of property investments to the degree that many real estate funds have.

Based on stress-testing using the baseline scenario, GE estimated $900 million in losses at its GE Real Estate portfolio, or an implied default rate of 8 percent. Under the adverse case, losses would rise to $1 billion.

TIGHTENING UP ON CONSUMERS

GE executives pointed out that the company's private-label credit card business, one of its segments most vulnerable to U.S. unemployment, has a different risk profile than a typical U.S. credit card business.

Mark Begor, president and CEO of GE Money Americas, said GE tightened consumer credit standards after exiting the U.S. subprime lending business. He added GE expects to cut worldwide origination of home mortgages to $1 billion this year, from $13.8 billion in 2008.

GE's finance operations, its largest segment, include commercial and consumer finance, aircraft leasing, real estate and energy financial services. The unit last year earned about $8.6 billion, about a third of GE's total.

GE also said its two infrastructure units were on track to meet its earlier first-quarter forecast, but CFO Sherin remarked that GE's media unit faced weak advertising markets and tough comparisons with a year ago.

Last month, GE cut its dividend by 68 percent to conserve cash. As of March 10, it had raised $40 billion of the $45 billion it had planned to seek on debt markets in 2009. Standard & Poor's then stripped GE of its AAA credit rating. Some investors took the one-notch cut as a sign that there were no major surprises lurking in GE Capital.

(Reporting by Scott Malone and Nick Zieminski; Editing by Gerald E. McCormick, Dave Zimmerman, Toni Reinhold, Gary Hill)