Domani giornata molto importante, GE terrà una conference call con gli analisti per illustrare più in dettaglio la situazione di GE Capital.
A giudicare da questo articolo, e dalle osservazioni degli analisti, dovranno rispondere a parecchie domande...
GE Capital Loss Lurking in Moscow Loans, U.S. Cards (Update2)
By Bob Ivry and Jody Shenn
March 18 (Bloomberg) -- General Electric Co.’s future may depend on folks like Yelena Zoshchenko.
GE Capital, the financial services unit of the world’s biggest maker of jet engines and power turbines, gave the Moscow real estate agent a loan for a car at an interest rate of 15 percent in June 2007. Then the Russian currency collapsed.
“The banks here used to literally grab you by your lapels and ask you to borrow,” said Zoshchenko, 58. “But not since the crisis started.”
Sixteen months into a global recession triggered by a jump in defaults by U.S. home-loan borrowers, some investors doubt GE has a handle on GE Capital’s far-flung operations. Those include the world’s largest store-name credit card business and lending in Russia, where late mortgage payments to the company rose 28 percent in the fourth quarter. GE’s stock slumped 61 percent since Sept. 15.
GE Capital, the world’s largest non-bank finance company with consolidated assets of $637 billion, accounted for $8.6 billion, or 48 percent, of the Fairfield, Connecticut-based parent’s $18.1 billion profit from continuing operations last year. Chief Executive Officer Jeffrey Immelt has said he wants the division to contribute about 30 percent of annual profit.
Keith Sherin, GE’s chief financial officer, predicted in December that GE Capital would earn $5 billion this year, even after absorbing $10 billion of consumer-related losses, a view not shared by credit rating companies and analysts.
‘Too Optimistic’
“We’re not expecting any real earnings or cash flow from GE Capital this year or next year,” Robert Schulz, an analyst at Standard & Poor’s Rating Service, told Bloomberg Television on March 11. That day, S&P cut the parent company’s credit rating for the first time since 1956. The downgrade was one level, to AA+ from AAA.
Management’s outlook “remains substantially too optimistic,” Citigroup Global Markets equity analyst Jeffrey Sprague wrote in a March 10 note to clients. He estimated 2009 GE Capital earnings of $3 billion.
GE Capital’s Achilles heel may be GE Money, its consumer- lending unit, which generated more than one-third of the division’s $25 billion of revenue and more than 40 percent of its earnings last year.
‘Hot Spots’
The consumer-finance business includes what Sherin told an investor conference in Miami on Feb. 10 were GE Capital’s two “hot spots” -- store-name credit cards and global mortgages. GE Capital also owns real estate and finances the purchase of machinery and aircraft.
GE Money had $60 billion of home loans in 50 countries as of February, after exiting the U.S. mortgage market in 2007. GE Money also owns or manages about $32 billion of U.S. private- label credit card debt in about 49 million accounts, according to data compiled by Bloomberg from company reports.
Mortgage losses may total as much as $5.96 billion through 2012, Sprague said last week in his note to clients. Losses in the company’s U.S. consumer credit business may reach $9.77 billion in the same period, he wrote.
“The bulk of GE’s assets are non-trading and therefore not subject to mark-to-market accounting requirements,” Nigel Coe, a New York-based Deutsche Bank Securities Inc. equity analyst, wrote in a Feb. 22 report. “GE management has the luxury of riding out the raging credit storm without liquidating assets for valuations below perceived intrinsic valuations.”
‘Deep Dive’
In part to quell such speculation, GE will hold a five-hour “deep dive” meeting in New York tomorrow to discuss the finance unit. A similar meeting was held on Dec. 2, though analysts and investors have made it clear they want more, Sherin said earlier this month.
In that meeting, the company “glossed over” its $190 billion portfolio of corporate loans and leases, Richard Hofmann, a London-based CreditSights Inc. analyst, wrote in a March 16 report.
“Investors are expecting they provide as much information and transparency as you’d get from a bank holding company, and that has not been the case to date,” Steven Winoker, a senior analyst at Sanford C. Bernstein & Co. in New York, told Bloomberg Television on March 13. “GE has been getting hammered by people who don’t know what the downside is.”
Sherin said last year that GE would use a Federal Deposit Insurance Corp. guarantee program when issuing debt to put the company on an “even playing field” with banks, which are also using it. GE has issued $41 billion in longer-term debt this year, all but about $4 billion of it guaranteed by the FDIC. The company can issue more than $50 billion more this year with government backing, which allows GE to pay less in interest.
GE rose 51 cents to $10.51 at 3:06 p.m. in New York Stock Exchange composite trading.
AA+ Rating
Immelt, 53, and Sherin, 50, have both said GE may use the Term Asset-Backed Securities Loan Facility, or TALF, which would offer loans to buyers of securities backed by credit card debt, reducing the cost for issuers such as GE Capital.
As a stand-alone company, GE Capital would have an A rating, five rungs lower than the parent company’s AA+, S&P said. That means GE Capital’s cost of borrowing would be higher because the unit would be perceived as having a tougher time making payments. GE said in a March 11 statement that GE Capital is among the only financial services companies in the world with an AA+ rating.
Washing Machines
“Right now, the finance side is dragging down the overall business, but it’s being supported by the industrial piece,” said Gary Cloud, who helps oversee $500 million of debt, including GE Capital notes, at AFBA Funds in Kansas City, Missouri. “It has been the other way around in years past, though not as lopsided as it is today.”
GE got into the credit business in 1932, financing the purchase of its own products such as washing machines. It started issuing credit cards in the 1980s, and as retail chains exited lending, GE Money picked up the business.
GE Money is currently the largest issuer of store credit cards and the second biggest of gasoline credit cards, according to data compiled by trade publication Nilson Report in Carpinteria, California. Clients include Wal-Mart Stores Inc., Chevron Corp., Lowe’s Cos., Gap Inc. and Dillard’s Inc.
GE abandoned an effort to sell the credit card business in September after the company failed to find a buyer willing to pay the price it wanted. The unit had about $11.6 billion of credit card receivable assets and $3.2 billion in credit card securities as of Dec. 31, GE spokesman Russell Wilkerson said.
Jobless Rate
Credit card losses are “probably more than any other products tied to the economy and unemployment rate,” said Timothy Kolk, a managing partner at Brookwood Capital Partners LP, a consulting firm in Peterborough, New Hampshire, that helps financial institutions analyze card portfolios. More than 23,000 Americans lost their jobs each day during February, the highest rate in more than 26 years, the Labor Department reported.
About 7.1 percent of GE’s U.S. consumer loans were at least 30 days late as of Dec. 31, up from 5.5 percent a year earlier, the company reported. That compares with about 5.6 percent of U.S. banks’ credit-card loans that were at least 30 days past due at year-end, up from 4.5 percent a year earlier, data compiled by the FDIC show.
GE said it’s ahead of competitors in preparing for an increase in defaults. Its so-called reserve coverage, or the amount set aside for bad debt, equaled 6.2 percent of card balances, compared with 5.5 percent at Discover Financial Services and 5.8 percent at Bank of America Corp., Sherin told investors at the Feb. 10 conference in Miami. In addition, retailers have agreed to cover some of the losses, GE said.
‘Baseball Bat’
Kolk said the type of loss-sharing that GE and other card issuers arrange with retailers is usually “modest,” so any protection may be “kind of like getting hit with a baseball bat but a little more gently.”
As consumers run short of cash, GE’s retailer cards may fare worse than bank cards because consumers may default on cards that are good only at one chain before giving up “general purpose plastic,” CreditSights’s Hofmann wrote in a March 3 report.
GE expanded its mortgage business into Asia and Eastern Europe two years ago to keep profits increasing by double-digit percentages, according to a March 2007 interview with then-GE Money CEO David Nissen. GE replaced Nissen in February 2008.
Portfolio Pressure
Of GE Money’s $60 billion of global mortgages in February, 5.6 percent are at least 90 days past due, according to Sherin. That compares with 5.7 percent of $197 billion in mortgages held by Citigroup Inc. Citigroup’s Sprague estimated that 10.7 percent of GE Money borrowers were 30 days to 90 days late in the fourth quarter, compared with an average of 3 percent for U.S. banks.
“Although these metrics may not be exactly apples to apples, it does highlight the relative pressure on GE Capital’s loan portfolio,” Sprague wrote in his March 10 note.
GE got out of the U.S. mortgage business in 2007, when it sold its subprime lender, Woodland Hills, California-based WMC Mortgage Corp. GE set aside about $240 million to cover demands that it repurchase WMC’s bad loans because they failed to meet contractual promises. The funds may not be enough, according to the company’s latest annual report.
In the U.K., which accounts for about 33 percent of the company’s mortgages, GE Money Home Lending Ltd. was the 14th- largest home lender with 13.8 billion pounds ($19.4 billion) of mortgages outstanding at the end of 2007, according to the latest data available from the London-based Council of Mortgage Lenders. The business there is “more of a subprime book,” Sherin said at the Feb. 10 investor conference in Miami.
Falling Home Prices
In September, it became the first home-loan company to be fined by the U.K.’s Financial Services Authority for a lending- related offense. The FSA cited GE Money for overcharging 684 mostly subprime borrowers on so-called retention fees, which GE Money kept as repairs were completed on houses, and underpaying home-owners when the retention periods ended. GE was fined 1.12 million pounds.
“This was an issue we proactively reported to the FSA ourselves,” GE Money’s U.K. spokesman, Mark Maguire, said in an e-mail. “We took the matter extremely seriously and have thoroughly reviewed our systems and processes to ensure this could not happen again.”
GE tightened mortgage underwriting in Britain last year and wrote 54 percent fewer home loans as property prices dropped, the company said in its annual report. The company also said it has insured 73 percent of its U.K. mortgages that cover more than 80 percent of a home’s value against default.
Russia, Latvia
Home prices in the U.K. fell 17.7 percent in February from a year earlier, data compiled by Lloyds Banking Group Plc’s Halifax unit show.
With lending in Russia, Latvia, Hungary, Romania, Poland, the Czech Republic and Slovakia, GE Capital has more than $26 billion in assets in Eastern and Central Europe, less than 5 percent of the unit’s total, according to Wilkerson, the GE spokesman.
In Russia, GE Money Bank quit mortgage lending last year, citing the worldwide financial crisis, according to the company’s Web site. It still offers short-term cash loans, charging as much as 59.9 percent for loans no larger than 500,000 rubles ($14,300). Delinquencies on the company’s loans in Russia rose 28 percent in the fourth quarter.
“The first quarter of this year is looking even worse,” said Leonid Slipchenko, a banking analyst at UralSib Financial Corp. in Moscow. The share of bad loans for banks specializing in consumer lending, including GE, may increase to as much as 25 percent by year’s end, he said.
Delinquencies
The company’s mortgage assets in Russia total $176 million, according to Robert Rendine, vice president of global corporate affairs for GE Capital Global Banking in London. None of the borrowers was more than 90 days behind on payments in the last quarter of 2008, he said.
GE Money Bank has about a 1.3 percent share of Latvia’s market, where the economy is expected by the central bank to contract 12 percent. GE Money’s lending in the country rose more than 16 percent in the fourth quarter, the Association of Latvian Banks reported. During that time, home prices fell 33.5 percent, the biggest decline in the world, from the same period in 2007, according to data compiled by Knight Frank LLP in London.
The Russia and Latvia businesses consist of about $1.4 billion combined, less than 1 percent of GE Capital’s assets, Rendine said.
Paying in Zlotys
GE Money’s Eastern and Central European banks will post a profit of $400 million in 2009, Sherin told CNBC on March 5. He said that even under a “stress case” scenario, the banks would show a profit of $200 million. That compares with $500 million in 2008, he said.
In Poland, about 70 percent of mortgages are in Swiss francs, according to data from the country’s financial market regulator. That’s because interest rates for Polish borrowers were lower in Swiss francs, said Stephen Wood, who helps manage $150 billion as senior portfolio strategist for Russell Investments in New York.
The Polish zloty has declined 32 percent against the Swiss franc since July.
“Eastern Europe is Europe’s version of subprime,” Wood said. “Not only do you get credit deterioration from the economic downturn, you layer on top of it a currency conversion crunch as well.”
For now, Yelena Zoshchenko says she can continue making payments on her car loan. She can’t say the same for her fellow GE Money Bank branch borrowers in Moscow.
“There are fewer people at the bank when I make my payment now compared with when I got the loan,” she said.
