Update: 5:00 p.m. At the end of GE Capital’s Investor Meeting, held at NBC Studio 8H in New York, GE’s Chief Financial Officer provided a recap of the day’s event.
Update: 3:30 p.m. As the formal presentations in the nearly 5 ½ hour marathon neared the end, GE Capital Chairman and CEO Mike Neal provided a recap –- and got a laugh when he joked to the audience, “We can do this every Thursday if you like.”
When it comes to GE Capital’s geographic diversity, especially its portfolio in Eastern Europe, Mike said: “We are in the countries with most of the assets you’d want to be in.”
What’s GE Capital’s future? “We think this business has been, and is, an attractive business,” Mike said. Saying the tough economy “won’t last forever,” Mike said: “We believe we’ll come out on other side of this somewhat smaller. … We’ll have a core [Capital] business that will look like GE businesses on the commercial side. … These are businesses that are strategically advantaged” in their respective industries, he said, citing media, aviation, energy infrastructure and other strong GE commercial businesses.
Mike pointed to the fact that even under the Federal Reserve’s adverse stress test, GE Capital is approximately breakeven in 2009 –- which would not require additional injections of capital.
Saying 2009 is “tough and it might get tougher,” Mike underscored that GE has a “very intense focus around risk.” Explained Mike: “I think we’re good at risk… We do believe our model is robust. We believe our model works. Despite this tough patch… we believe we can navigate out of 2009 and 2010.”
Returning to the overriding goal of running the company to be “safe and secure,” Keith Sherin, GE Vice Chairman & Chief Financial Officer, said: “We feel great about our liquidity position. We are prepared for a very tough outlook… And we are prepared to weather this… We have great businesses at GE, great people… and we will work our way through a tough cycle.”
“Even under the adverse stress case, we can handle losses and not need additional capital,” he said. “I think we’ve given you a pretty severe (loss) case today… Some of these won’t materialize. I don’t see a case where we’d have to raise external capital.”
Update: 2:30 p.m. Dmitri Stockton, president & CEO of GE’s Global Banking & Joint Ventures businesses, explained GE’s strong position in Eastern Europe, especially in GE’s key markets of Poland, the Czech Republic, and Hungary.
“We’ve been in this business for about 15 years,” Dmitri said. “Near term we think there will be some volatility, but these are core businesses and we think they are attractive long term… We have a very high quality portfolio here and we have been in this region quite a long time.”
Regarding mortgages in Eastern Europe, Dmitri explained that GE does not have exotic mortgage products, low documentation loans, does not let borrowers provide self-certification during the loan process, and does not offer interest-only or teaser loans –- all of which were at the heart of the U.S. mortgage meltdown.
Among the factors used in stress testing the Eastern European mortgage portfolio were tough key assumptions, such as the potential for further declines in home prices in the region of 10% to 20%, a further increase in unemployment and currency declines of another 15% to 30% from today.
He added that in the 4th quarter of 2008, GE Capital reduced its mortgage and auto loan originations in the region by 50% and in 2009 that planned reduction is 80%.
Update: 1:45 p.m. The GE Capital team took the audience through deep dives in the business and the detailed ways in which each part of the portfolio’s stress test was made.
Jayne Day, GE Capital’s real estate vice president and chief risk officer, said that when it comes to commercial real estate, it’s important to understand not just what the company does –- but what GE typically doesn’t do.
GE avoids commercial real estate when it comes to areas such as construction lending, land loans, single-family residential development, second mortgages, malls, so-called “trophy” buildings of high name recognition, and resorts.
Instead, Jayne said GE focuses on senior secured lending in markets we understand, mid-range office properties, properties in good locations and affordable middle class apartments — not luxury ones — and other properties such as retailers with a grocery focus or warehouses in office parks with multiple tenants.
Even under the Federal Reserve stress cases, losses would be manageable, she said. And in commercial lending and leasing, GE explained that it focuses on products and assets that the company originates –- and holds, which gives stability to the portfolio and allows GE to realize the long-term value of the assets involved.
In the U.S. consumer business, which includes private label credit cards, Mark Begor, president and CEO of GE Money, discussed how GE Capital has been tightening consumer credit over the last two years. As a result, the average consumer credit score of people with bank cards are comparable to those holding GE private label cards.
He cited a number of other actions taken to cut down risk in the credit card business, including adding more collectors for delinquent accounts and exiting higher loss areas, such as those related to RV sales, boat sales and home improvement.
“Entry rates of new accounts going delinquent are at historic lows,” he said of GE’s portfolio. “We attribute the vast majority of this to actions we took 2 years ago… This is good news as we go into 2010. Conversely, of the accounts that go into delinquency, most do not come out.”
On GE’s home lending in the United Kingdom, Mark said that while there are risks in that market, he stressed that it is fundamentally different from the U.S. market. GE, he said, originates mortgages to hold them in the U.K., not to sell them. And more of the U.K. properties are owner occupied compared to the U.S. mortgage market. He said that GE is further reducing its risk in the U.K. by shrinking our activity.
Update: 11:45 a.m. Watch an unedited video replay of the opening remarks at GE Capital’s Investor Meeting
Update: 11:15 a.m. Keith Sherin, GE Vice Chairman & Chief Financial Officer, opened GE Capital’s investor meeting, underscoring GE’s overriding priority of running the company to be safe and secure over the long term. With sufficient capital and alternatives to weather adverse economic conditions, GE, he said will come out of the current economic cycle as a stronger, more focused and competitively advantaged company.
The GE team, he said, is focused on resizing our cost footprint in a meaningful way and GE is committed to GE Capital.
GE Capital Chairman and CEO Mike Neal said of the detailed nature of the meeting: “We treated this like an internal operations review. There are 174 pages [of slides] — we’re going to grind you through things you probably haven’t seen before. And like I said, just bear with us. There’s a lot. … We have the whole team here. We have all the business leaders, we have the risk, people, we have the finance people. I think we’ll be able to deal with pretty much anything that might be on your mind.”
“We have what we call the factory because we think of ourselves in the same terms as any other GE business,” Mike said. “That factory has low cost. We think we are risk adverse. We think we spend quite a lot of time on that. And it will show, and does show, in our results.”
Jim Colica, GE Capital’s vice president of global risk management, said of his management team: “They’ve seen recessions, seen dislocations, seen hard times — and that’s a very big benefit for us.” Their experience, he said, is what gives GE the “visibility” needed to monitor risks around the world.
“We stress our portfolio asset by asset, business by business, product by product, and market by market,” he said.
Addressing GE Capital’s portfolio, Jim pointed to the fact that real estate accounts for $85 billion of the total $637 billion in GE Capital’s total assets. And of GE Capital’s total assets, only $70B, or 11% is in developing markets, he said. The majority of GE Capital’s assets –- 70% — is commercial financing activities, he said, citing GE’s very broad diversification of holdings across numerous industrial sectors.
When compared to banks, GE, he said, has less consumer exposure, no U.S. mortgage, auto or student loan exposure, and GE’s holdings are more global. Importantly, he said, “We have GE people in each market where we own properties. We are very active managers.” This reduced exposure to these segments of the market –- and the hands-on approach in the markets in which we do business — reflects a more conservative approach that strengthens GE Capital, he said.
9:00 a.m. GE Capital’s investor meeting began this morning from NBC Studio 8H in New York, with the company underscoring that it expects GE Capital Finance to be profitable in the first quarter and for all of 2009. GE underscored that its funding position is strong, with 93% of 2009′s funding goal already completed.
“To give our investors further assurance and recognizing the uncertainty of the current climate, we have stress tested GE Capital Finance using assumptions consistent with the Federal Reserve’s base case and a more severe adverse case, which contemplates unemployment peaking at 10% and GDP declining by more than 3% in 2009,” GE Vice Chairman & GE Capital Chairman and CEO Mike Neal said. “Even under this more severe case, which would potentially cause our losses and impairments to increase significantly, GE Capital Finance would still essentially break even and not require additional capital.”
“GE Capital Finance’s key capital ratios compare favorably to banks, including the important ratio of tangible common equity to tangible assets (TCE/TA),” Neal said. “With the recent $9.5 billion capital infusion by GE, GE Capital Finance will have a TCE/TA ratio of approximately 6%, which reflects a very strong capital base.”
* Read GE’s morning statement
* Watch the webcast
* View key charts from the meeting
