By Scott Malone
General Electric Co expects GE Capital to be profitable this year, though if the U.S. economy deteriorates more than the Federal Reserve currently estimates, the finance unit could post break-even results, company executives said on Thursday.
Stress-testing based on the Fed's baseline scenario for the economy shows that the unit's profit could be $2 billion to $2.5 billion this year, GE Capital's Chief Executive Michael Neal said.
Even in the adverse case we're probably break-even to slightly profitable, Neal said at a special meeting the company called with investors and analysts to reassure them about GE's health.
The multinational U.S. conglomerate had forecast in December that its GE Capital unit would earn about $5 billion in 2009. GE's finance operations, its largest segment, include commercial and consumer finance, aircraft leasing, real estate and energy financial services.
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 held its shares are. About 40 percent of the stock is held by individual investors.
GE produces aircraft engines, locomotives, household appliances, lighting and more, and has operations in more than 100 countries.
GE officials emphasized the tighter standards and controls GE has over its finance operations, compared to commercial banks. Commercial banks around the world have been slammed by exposure to mortgage and consumer credit defaults, driving their stock prices down.
Unlike many U.S. banks, GE has no exposure to U.S. construction loans or U.S. mortgages, said Jeff Bornstein, GE Capital's chief financial officer.
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 the typical U.S. credit card business.
GE's private-label credit card customers on average have a balance of $620 on a credit limit of $2,512, below an average $3,000 balance on a limit of $10,800 for the typical bank card.
Mark Begor, president and CEO of GE Money Americas, said that after its exit from the U.S. subprime lending business two years ago, GE tightened its consumer credit standards.
We really moved almost two years ago to take action on underwriting, Begor said.
Begor said GE expects to cut its worldwide origination of home mortgages to $1 billion this year, down from $13.8 billion in 2008.
Shares of GE, based in Fairfield, Connecticut, were rose 1.94 percent, or 20 cents, to $10.52 in afternoon trading on the New York Stock Exchange, after rising earlier in the session as high as $11.35, their best level since February 13.
HANDLING THE STRESS
GE plans to use some of its $60 billion in capacity left under the U.S.-government backed Temporary Liquidity Guarantee Program (TLGP) to pre-fund debt due to mature in 2010, said Treasurer Kathy Cassidy.
In October, the Federal Deposit Insurance Corp introduced TLGP to guarantee certain bank debt to increase confidence in the banking industry, add more liquidity and reduce the risk of bank runs.
GE, the world's largest maker of jet engines and electricity-producing turbines, has run extensive stress tests on GE Capital's portfolio and found that even in its worst-case scenario GE would not see itself needing to raise capital, Chief Financial Officer Keith Sherin said.
GE Capital, which has businesses ranging from investing in commercial real estate to financing sales of heavy equipment made by GE, last year recorded profit of about $8.6 billion, about 33 percent of the GE total.
Company officials noted that even in what it considers the riskiest portion of its real estate loan portfolio, some 92 percent of its customers are current in their payments and a large portion of the portfolio is supported by other guarantees.
GE plans to operate all its properties over the long term, said Ron Pressman, president and CEO of GE Real Estate.
Because GE does not use debt to fund most real estate investments and does not mark up the value of its properties, instead depreciating them by 3 percent per year, it has not had to write down the value of its property investments to the degree that many real estate funds have, executives said.
REAL ESTATE LOSSES
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 by 2 percent this year, with a rebound in 2010, and assumes 8.4 percent unemployment. The Fed's 'adverse' scenario calls for a 3.3 percent economic contraction and 8.9 percent unemployment.
GE said that based on stress-testing using the Federal Reserve's baseline scenario for the U.S. economy, it would expect $900 million in losses against loans at its GE Real Estate portfolio, representing an implied default rate of 8 percent.
Assuming the Fed's adverse case for the economy, that number would rise to $1 billion, or an implied default rate of 10 percent. Its current implied default rate is 1.01 percent, said Jayne Day of GE Real Estate.
Concerns over how well GE Capital is reserved against an expected rise in defaults have hammered the company's shares. GE's stock is down about 71 percent over the past year, a steeper slide than the 38 percent fall of the Dow Jones industrial average.
Last month, GE cut its dividend by 68 percent in a move 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 last week stripped GE of its AAA credit rating. Some investors took its 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)