In reaction to losses and rising provisions at GE Capital and a March downgrade of its credit rating, GE has been shrinking the unit. It is in the process of reducing the size of GE Capital to about $400 billion in assets, from more than $600 billion last year and $557 billion at the end of June.
GE Capital, as the executives noted in the webcast, has not posted a loss during the recession; in general, they said, it is performing as expected and as was outlined in the March presentation. Still, the unit's profit plunged 80 percent in the second quarter, with the real estate unit -- the only GE Capital division to lose money -- posting a $237 million loss. Investors, naturally, have been concerned about the unit, as they were about GE Capital's loss provisions.
Regarding real estate, GE said it sees signs of improvement, even in its U.K. mortgage business, which was one of the main concerns. Losses there will peak in 2010, as will the loss provisions that have weighed it down. The adverse case scenario predicts losses of $17.5 billion in 2010 and $16.9 billion in 2009. Losses will be $12.1 and $13 billion under the Federal Reserve's best case scenario. According to executives, these are manageable, and the company won't need to raise additional capital.
Overall, GE Capital is expected to earn about $2 to $2.5 billion this year in the Fed's base case scenario; execs noted that losses are trending better than the best case. The company managed to issue $12 billion in non-guaranteed long-term debt, and reports strong demand for its issues. It will shrink its long-term debt to $230-250 billion by the end of 2012, down from $369 billion at the end of 2008. Overall, between fourth quarter 2008 and 2010, total debt will decline by $65 billion, from $515 billion to $450 billion. GE also aims to reduce its selling, general and administrative expenses by 29 percent this year.
GE discussed the Obama's administration reform proposals, among them separating non-financial from financial companies, which would mean it would have to spin off GE Capital. GE is strongly against this, but believes that the process will be long and slow for now.
Also, GE last week has received approval to start pulling back from the Temporary Liquidity Guarantee Program. Execs have said that the company will stop issuing commercial paper through the TLGP and detailed its plan as it exits TLGP.
Among the many many details that GE shared, investors found something they liked, or at least caught on the executives enthusiasm about how GE Capital will come out of this stronger, leaner and meaner. Consequently, the stock has generally traded higher in today's session.
Disclosure: Long GE