General Electric Co's
GE Capital is roughly on track to generate the $2 billion to $2.5 billion in profit it forecast based on the Federal Reserve's base case for the U.S. economy. That number would be well below the $8.63 billion it earned last year, but in part reflects the largest U.S. conglomerate's efforts to shrink the unit.
We're fairly close to where we thought we would be with the base case, GE Capital Chief Executive Mike Neal told an investor meeting monitored over the Internet. We don't have rose-colored glasses on about the environment. It remains challenging, but we think we're prepared.
GE, the world's largest maker of jet engines and electricity-producing turbines, expects GE Capital to end the year with $480 billion to $485 billion invested, down from $525 billion at the end of 2008, in a move to focus the unit more closely on financing equipment produced by its industrial parent.
By the end of 2012 it aims to cut its long-term debt to $230 billion to $250 billion, down from $369 billion at the end of 2008.
There are parts of the portfolio that of course would give someone pause and concern, said Bernstein Research Analyst Steven Winoker, in New York, citing commercial real estate, British mortgages and private-label credit cards as areas of particular concern. But it looks like they are pursuing an aggressive course of action in those areas.
GE Capital also finances purchases of big-ticket products made by its parent company and makes commercial loans to mid-sized businesses.
Its shares were little changed, rising 6 cents to $12.38 in Tuesday afternoon trade on the New York Stock Exchange. The cost of insuring GE Capital debt with credit default swaps declined.
PARENT MAY PAY INTO CAPITAL
While the company does not expect to have to raise additional capital for the finance unit, parent GE may have to move $2 billion to $7 billion into GE Capital in 2011 to help it cover fixed expenses, depending on how bad the economy gets.
The company said its 2010 stress test modeling predicts similar losses on its loans to what it has seen in 2009, and noted that so far this year losses were trending slightly better to what it had forecast using the Fed's base case.
The portfolio is holding up pretty close to what they laid out back in March, said Daniel Holland, an equity analyst at Morningstar, in Chicago. The concerns on the commercial real estate side are still there, but the other pieces of the portfolio, credit cards and things like that, seem to be doing OK.
Fairfield, Connecticut-based GE has stopped giving per-share profit targets for the whole company, instead providing investors with a framework of how it expects its various divisions to perform. Analysts expect per-share profit to fall by about half this year.
Another risk facing GE investors is the Obama administration's proposed revamp of the U.S. financial regulatory system, which could force the company to spin off GE Capital. GE officials said they have been lobbying intensely against any such move.
GE last week said it had received approval to start pulling back from a U.S. government-backed debt program. It said it would stop issuing commercial paper through the Temporary Liquidity Guarantee Program.
This was GE's second investor briefing of the year on its Capital unit, though Tuesday's session lasted just two-and-a-half hours, less than half a marathon March briefing, conducted at a time of intense market volatility.
GE is not simply a bank, said Lawrence Glazer, managing partner of Mayflower Advisors in Boston, whose investments include GE bonds. That is the frustration that most investors have, on transparency. They don't know what is inside of GE.
(Reporting by Scott Malone, additional reporting by John Parry in New York; Editing by Maureen Bavdek and Tim Dobbyn)