Everything Warren Buffett: BLOOMBERG: GE Capital ‘Right in Line’ With Forecast, Neal Says

Monday, June 15, 2009

BLOOMBERG: GE Capital ‘Right in Line’ With Forecast, Neal Says

By Rachel Layne

June 15 (Bloomberg) -- General Electric Co.’s finance unit is performing as it predicted in March using the Federal Reserve’s so-called base case for the U.S. economy, GE Capital’s chief executive officer said.

“We are pretty much right in line with what we said,” Michael Neal, who is also a GE vice chairman, said in an interview today at the Paris Air Show. “We’re right on with funding, with profits, in terms of shrinking the balance sheet.”

GE Capital was tracking toward profit of $2 billion to $2.5 billion under the base case, Neal said in March, instead of a $5 billion target set in December. The company is shrinking its balance sheet after the biggest global financial crisis since World War II curbed profit growth in real estate and consumer lending. Fairfield, Connecticut-based GE plans to update investors at a meeting next month.

“Our funding is in better shape,” Neal said. “We’re going to have an OK second quarter. Now anything can happen, but I’d say we’re tracking a little bit better than Fed base case. Some businesses are doing better than others.”

There are signs the economy is improving and Neal said GE’s consumer-finance unit in the U.S., the biggest provider of private-label credit cards, is doing better than he expected.

“Our consumer stuff is doing pretty well, which I think is a good sign” for the economy, said Neal, 56. “The business is profitable and doing pretty well.”

GE isn’t subject directly to Federal Reserve metrics because it isn’t a bank, so it performed its own risk tests in March based the Fed’s criteria instead.

Commercial Real Estate

Commercial real estate markets are still fragile and likely haven’t reached a bottom, Neal said. GE Real Estate’s profit last year fell to $1.14 billion from $2.29 billion in 2007.

“We’re mostly playing defense -- the market is stressed,” Neal said. “We’re pretty close to where we think we ought to be. The whole idea is to have a smaller real estate company but more profitable.”

In areas where GE wants to grow, such as its aircraft- leasing and financing unit, the company is lending. “I’m here to show we’re open for business,” Neal said.

Stamford, Connecticut-based GE Capital has outlined a goal to shrink GE’s balance sheet to $400 billion to $450 billion in assets, down from $637 billion last year. It accounted for $8.6 billion of the parent’s $18.1 billion profit from continuing operations last year. GE Chief Executive Officer Jeffrey Immelt has said he wants to shrink GE Capital to about 30 percent of annual profit. GE no longer issues quarterly earnings forecasts.

“If we had to, we could shrink it faster,” Neal said. “But the idea is to end up smaller but more profitable company that relies less on a wholesale funding model.”

Financing Debt

GE Capital, which didn’t take funds from the Federal Reserve’s Troubled Asset Relief Program, can take advantage of two government programs. One allows GE Capital to issue long- term debt insured by the Federal Deposit Insurance Corp., and the other gives it the ability to sell into the Commercial Paper Funding Facility set up by the Fed, which it only tapped once.

Once the FDIC program expires, GE should be able to fund its smaller balance sheet, Neal said. It’s already been able to sell debt outside the program, has “pre-funded” all the debt coming due in 2009 and has begun issuing debt outside the FDIC program to help to refinance debt coming due in 2010.

“We’ve been able to do debt outside those markets,” Neal said. “Based on the advice we get, we’ll able to fund at the levels we’re thinking about.”

GE has been able to reduce its outstanding commercial paper to just under $55 billion, from more than $100 billion about two years ago.

Investors have cut GE’s market value by about 55 percent in the past year, largely on concern about risks in the finance arm. GE declined 41 cents to $13.10 at 2:40 p.m. in New York Stock Exchange composite trading.

GE in October got a $3 billion investment from Warren Buffett’s Berkshire Hathaway Inc. and sold more than $12 billion in common stock to help shore up its balance sheet.