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GE Capital Finance (or GE Capital Services) consists of GE Commercial Finance and GE Money. The division has continued to drag down GE's overall earnings in the wake of the 2008 Financial Crisis. In Q3 2009, GE Capital Finance reported a pretax loss of $997 million (compared to an expected loss of $275 million), causing GE's overall net income to fall 45%. [1] CEO Jeffrey Immelt is actively shrinking GECS as he builds GE's energy, transportation, and healthcare businesses. [1]
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GE Commercial Finance
GE Commercial Finance (19.8% of Revenue)[2] provides products and a broad range of financial services promoting business expansion. The division offers loans and leases for customers needing capital to construct new facilities, purchase new equipment, or acquire new real estate. GE Commercial Finance services the construction, manufacturing, transportation, telecommunications, and healthcare industries. [2]
Products and Services
GE's Commercial Finance division provides various financial services and products to a range of commercial customers. Specifically, Commercial Finance offers loans, financial management advice, and equipment leasing, all of which are aimed at promoting business expansion. Commercial Finance's assets total over $230 billion, making it the largest of GE's finance businesses.
Commercial Finance offers:
- Capital Solutions
- Business financing solutions for companies that require large amounts of capital, especially for mergers and acquisitions.
- Financing solutions for government and municipal entities.
- Auto and corporate aircraft fleet financing, leasing, and management systems.
- Business solutions for tax-exempt businesses and non-profits.
- Asset sales, including construction and mining materials, manufacturing equipment, marine vessels, media/broadcasting equipment, printing and publishing equipment, restaurant real estate, and previously owned transportation vehicles.
- Commercial real estate sales, including manufacturing facilities.
- Corporate Financial Services
- Concentrates on lending money for companies to operate, grow, or restructure.
- Healthcare Financial Services
- Concentrates on healthcare-related financing and specialization training for doctors who are new to the practice.
- Real Estate
- Provides financing for a variety of real estate ventures, including the construction and purchase of housing, bridges, golf courses, etc.
Trends and Forces
GE Commercial Finance is very well diversified, with its assets spread across 66 industries. As such, poor performance in any one of them would have a limited impact on Commercial Finance's performance.
Real Estate Market - buying at bargain prices
The division is most exposed to the real estate market, which accounts for around 13% of its total assets. Because Commercial Finance accounts for around 44% of GE's total assets, fluctuations in real estate prices can impact the value of GE's assets overall. In 2006, Commercial Finance's real estate investments gained 76% as a result of higher property values. The company has a well-worn playbook for dealing with distressed properties. After the savings and loan crisis, GE Capital bought many properties at bargain prices. When the company forecloses on a borrower, it moves quickly to salvage the remaining value from the property, renovating, updating the amenities, or using local connections to produce new occupants. Ronald Pressman, CEO of GE Capital Real Estate, said "We take over assets and run them like a factory." [3] However, the bottom in the real estate market by some indications has not come yet, which means this strategy will only do so much for GE in the short term.
Interest Rates
Rising interest rates can have several effects on GE's Commercial Finance division. In terms of real estate, a rise in interest rates makes borrowing money more expensive, which can lead to a slowdown in the housing market and lower property values. Changing interest rates can impact the value of Commercial Finance's sizable real estate holdings. Interest rates' effects aren't limited to the real estate market, however. Higher interest rates generally result in lower consumer spending across the board, which can impact both the value of Commercial Finance's assets and demand for its services. Lower interest rates, though they're generally used as a tool to jumpstart a sluggish economy, would likely benefit GE by increasing consumer spending. Despite this, GE Commercial Finance does not rely on capital markets to raise cash for lending, instead this division lends money earned elsewhere by GE.
Competition
The broad range of services offered by GE Commercial Finance makes it somewhat difficult to compare to other companies. Two companies that target a similar market are Citigroup (C) and CIT Group Inc (DEL) (CIT). These firms both offer a variety of services for commercial customers, including financing, leasing options, and financial management solutions.
| Commercial Finance income data, 2006 | Net Revenue (mm) | Revenue Growth (%) | Net Income (mm) | Profit Margin | |
|---|---|---|---|---|---|
| GE Commercial Finance | $23,792 | 15.24% | $5,028 | 21.13% | |
| Citigroup | $89,615 | 7.14% | $21,538 | 24.03% | |
| CIT Group | $6,927 | 22.56% | $1,046 | 15.1% | |
Note: This chart includes total revenues and income for Citigroup and CIT Group Inc. The data for GE is specific to the Commercial Finance segment.
GE Money
GE Money is the second part of GE Capital Services. Unlike its Commercial Finance counterpart, GE Money is aimed at providing a range of financial products and services to individual consumers (though it does offer business services as well). GE Money is further distinguished from Commercial Finance in that it's not as connected to the other segments of GE as Commercial Finance is. Much of the commercial business is tied to the financing, leasing, and sale of GE products, such as airplanes and wind turbines. GE Money, on the other hand, has increasingly expanded into the traditional banking market, offering products such as home mortgages and savings accounts. This exposes the company to a whole different industry, which can be both good and bad.
Products and Services
GE Money provides customers with a range of financial products and services, including:
- Private-label credit cards
- Corporate travel and purchasing cards
- Debt consolidation
- Mortgage and motor solutions
- Home equity loans
- Personal loans
- Checking and savings accounts
Trends and Forces
Interest Rates
Interest rates can greatly impact financial services firms, including GE Money. As interest rates rise, consumer spending tends to decrease as a result. For one reason, it's more expensive to borrow money, as the higher rates mean higher interest payments on any amount borrowed. Another reason is that as rates increase, consumers get higher returns on money they put into savings accounts, encouraging them to spend less and save more. Rising interest rates generally have a negative effect on financial institutions like GE Money. When rates are high, GE Money is able to charge higher interest rates on loans, but the demand for loans is likely to decrease. At the same time, banks will have to pay higher rates on consumers' deposits, which are inclined to increase. Additionally, rising interest rates can lead to higher rates of default on adjustable-rate mortgages, as seen in the recent subprime lending bust.
Housing Market
Around one fourth of GE Money's assets are in mortgages, which are subject to conditions in the housing market. Downturns in the housing market can reduce demand for new mortgages, which was one of the main forces driving GE Money's growth for several years. Additionally, car sales have been shown to correlate with new home construction and sales. Housing slumps can decrease demand for auto loans, which is another of GE Money's largest asset bases. Relative to other companies in the finance industry, however, GE Money's portfolio is relatively light on mortgages; the estimated industry average of 65% is much larger than the 27% of GE's assets held in mortgages.
Global Presence
GE Money operates in nearly 50 countries, limiting its exposure to economic downturns in any one market. For example, the impact of rising U.S. interest rates or slumps in the domestic housing market is somewhat mitigated by the fact that over three-fourths of GE Money's business comes from international sources. Additionally, emerging international markets often provide larger growth potential than established markets. International expansion has been a key source of growth for GE Money, but it does entail a certain degree of risk. Emerging markets can be relatively volatile, and the wide range of laws and regulations can be difficult to navigate.
Competition
General Electric's Capital Services segment competes directly with banks such as Citigroup (C) and Bank of America (BAC). All three firms issue credit cards and offer mortgages, loans, and savings services. The greatest difference is that finance is only one part of GE's overall business while Citi's and Bank of America's revenues are largely based in financial services. Despite its competitors' focus on finance as a primary source of revenue, GE Money has performed well, especially considering that it's the third-smallest division of a larger company.
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