GE Capital afternoon session

March 19, 2009, 11:23 PM UTC

During the second half, attendees were treated to brown bag lunches and a look at UK mortgages, Eastern Europe, and securities held for investment. The stock fell steadily amid a larger market rout, though investor sentiment had kept it buoyant in the morning. During the Q&A the stock went into negative territory, and ended the day down about 1.8%.


As things start up with UK mortgages and consumer finance, I’ll share some feedback:
Reading through the GE Presentation. A former employee writes that he’s not whether all the emphasis on “lease-to-hold” is a product of strategy or necessity due to the fact that after Oct 2008 the third party debt markets dried up. If you’re enterprising, maybe it’s time to start looking at whether GECC’s capital markets team syndicated its equipment portfolio to third party investors. If anyone out there has thoughts on this, let me know!

Looking at US consumer finance, the company says that in 2007, when it saw the US consumer weaken, it tightened up exposures to the market.
If you go to your Bloomberg terminal and pull up some of the master trust documents inked on credit card backed securities issued by GECC, you can dig deeper on this issue. They may have seen problems, but cards were still being issued in 2007 to customers at stores like Wal-Mart, the Gap, and Sam’s Club in locations like Florida and California. Sanford Bernstein analyst Steve Winoker, in an earlier research note, had asked for details here. Am interested to see this deep dive into where accounts are and with which retailers. They also did white label credit cards for JC Penney and Mervyn’s, along with dozens of other big retailers.

This is their case for why white label credit cards are a better business than bank cards, as well as underwriting actions taken when they saw the market deteriorate.

They have taken actions to account for higher unemployment, though it seems up 9% (here’s a delinquency-to-unemployment correlation table) and are driving yields to offset losses.

The piece of the portfolio under stress, the say, could be a problem because once a consumer gets into trouble in this environment it’s so hard for them to come out. They’ve added 1,000 collectors. And then they put up their anticipated stress case for consumers, global, rather than US only. Analysts have said that they are concerned specifically about the US consumer, so let’s hope we get a more granular slide. There is a slide for the sales finance stress case. I had to take a call, so if you have the US consumer slide or a comment, please let me know.


Mortgages. UK is the worry and they say in the UK they have solid underwriting and aggressive collections all over the world.

While some seem pleased by the “how we do it” tone of the presentation, some seem not impressed by the emphasis on management skill (we have great standards) and would like to see stress case scenarios that look at what happens if unemployment goes above the 10% mark.

Stock update. GE shares have given back about half of their earlier gains, but are still up more than 3%.

They’re shrinking the mortgage business everywhere and as of 2008 the mortgage portfolio composition shows that UK mortgages made up 51% of the total.

Here’s the UK mortgage detail. About 23% of the UK home lending book is a second mortgage. Once again, emphasize originate to hold. They also say the UK mortgage market and consumer was significantly different from the US. Any UK pros out there care to comment? Here is their UK economic environment forecast or 2009 and the way GECC has layered risk and losses.

With about an hour left in the meeting, it’s almost q&a time; and while a lot of data has been presented we’ll see what the audience thinks has been left out.

An interesting aside from a listener… the mortgage team is very proud of the fact that it has mortgage insurance on a lot of the portfolio. AIG, their main insurance provider, is in trouble.

Here is their UK mortgage stress scenario.


They’re talking Eastern Europe, thanks largely to questions first raised by Peter Eavis over at the Wall Street Journal about the durability of the portfolio.

They do think they’ll see slower growth in the area. They reduced origination in 2008 and increased collections. (Increasing collection capacity is a theme running through the presentation).

They are saying that this is still an attractive business despite near term volatility. They’re working with the No. 5 bank in Poland, the No. 4 bank in the Czech Republic, and the No. 8 bank in Hungary. Let us hope that these top tier banks in Poland, the Czech Republic, and Hungary had better underwriting standards and risk controls than, say, US counterparts like Wachovia and Citigroup.


The stock is now down on the day by about 1%. GE was strong in the morning up 6%, gave back half its gains around noon, and then continued to fall during the UK mortgage and Eastern European bank portion of the presentation. BUT, it’s important to mention that the markets were being dragged down by financial stocks in the morning and that GE may have succumbed to the trend. The stock could pop back into positive territory.

1:29 GE’s been in Eastern Europe for 15 years, which is good. Since 1994, when the company entered the area, there was tons of turmoil and backtracking as different countries opened to capitalism and stabilized. But as for how they’ll handle a severe, never-before-seen downturn, that is still an open question. GE has a stress test for this area. But I wonder, was there an adequate stress test, say, in the beginning of 2007, for what was to happen to US homeowners and banks?


Just noticed there are comments to this blog… will start getting them up as the company goes through their summary.

See $2 billion to $2.5 billion in earnings for GECC. S&P sees little to none in earnings.

The company sees a worse case scenario of $18.4 billion in impairments and credit costs for GECC.


Overall, executives are striking a pretty positive tone and the stock is up again. Heading into the Q&A I’m getting a little bit of feedback.

One analyst thought that the earnings stress cases met expectations, and that expectations were for them to be pretty bad. But the equity downside might have been more limited than expected, which is good for sentiment.

Of course, there are always a some bears about. Another listener says he thinks GECC still needs to be more aggressive about assumptions re: unemployment and GDP, as well as consumer credit card defaults. And Eavis that WSJ still thinks the big question is whether they’ll need to raise more capital.


GECC took the average of the top 3 banks and compared coverage ratios. GECC has 6.3% of reserve coverage against its US credit card portfolio v. 7.8% for the banks. GECC has 5.46% reserve for sales financing v. 3.1% for the banks.


For the investment securities book (i.e. bonds that the company holds), about half the book is in corporate debt. Most of their subprime mortgage backed bonds are wrapped by monoline insurers including FSA, MBIA, Ambac, and FGIC.

They also provided a list of all the foreign banks in which the company has a stake.


Mike is wrapping it up “five hours, 20 minutes, one fire alarm, and 160 pages later.” The good thing is that this move to be more transparent has worked for GE and soothed nerves. It seems like the problem for the stock wasn’t necessarily weakness in the book, but a lack of transparency and company assurances that everything would be fine, that they wouldn’t lose the AAA, and that they wouldn’t have to cut the dividend to save cash.

The company today came out with loss projections and lowered its earnings estimate by quite a bit, and the stock is still up 1%. Maybe investors just needed to know they weren’t dealing with a black box?


Here is their view on Q1.

I’m hearing that bond desks are still feeling cautious about the company’s default assumptions and full year outlook, but not acting. The next big catalyst will be when we finally see earnings strength or weakness.

It’s late. Here are a couple of highlights from the Q&A:

On GECC earnings:
GECC said it should generate between $2 billion and $2.5 billion in net income in 2009 if unemployment averages 8.4% this year and the U.S. economy shrinks by 2% (check out the full WSJ story here). But in a more extreme recession, where unemployment averages 8.9% for the year and the economy shrinks 3.3%, GE said the finance unit would break even. Someone in the audience mentions that most of the $2 billion to $2.5 billion in earnings comes from a tax benefit, rather than actual earnings. He wants to know whether the company has taken all the costs out in these calculations or if there is a new target.

Management says cost take outs are ongoing.

Interesting. As pointed out by this question and others, management has left room for the possibility that GECC will, as predicted by S&P, earn nothing in the quarter.

Also, a Barclay’s analyst asked about the tax assumptions. People don’t seem comfortable with so much of earnings riding on a tax benefit.

Someone asks if the company has a benchmark for impairments and losses this time around compared with during other recessions.

GECC says it’s tough to compare this book and this market to get a benchmark.

Someone wants to know how the company can run a match funded book if it is borrowing so much in advance.

GECC says this is not a change in match funding, but it is inefficient from a return-on-investment standpoint. But from a liquidity perspective, it’s worth it.

Scott David at Morgan Stanley wants to know about GECC’s cost of capital.

According to management, it’s little changed from December 2, 2008, when they had the first GECC meeting. It’s at about 4.6%.

In response to a layoff question, GECC says they can’t give a headcount expectation for 2009. But the company does disclose that it laid off between 20,000 and 25,000 people worldwide last year.

The Goldman analyst wants to know about the leveraged loan book, which he says the company is carrying in the 90s whereas the market is pricing similar securities near the 70s.

GECC says it regularly goes in to value the portfolio, but doesn’t take write offs unless there is impairment.

Near the end, someone wants to know why the company didn’t just suspend the dividend altogether. Sure, you might end up overcapitalized, but in a world where he sees unemployment going to 10% (above GE’s assumption for their stress tests) he thinks this would be fine. Plus, he adds, the company is heavily reliant on government backing to roll and issue debt, and those programs could end. That’s a lot of uncertainty.

GECC said they didn’t cut because after looking at their capital position and the additional ways they can wring cash out of the company, they decided they didn’t need to slash the dividend altogether.