General Electric Plans to Cut Down Financial Unit

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Mar 16, 2015

General Electric (GE, Financial) is moving ahead with its plan of cutting down its financial unit. Last year, the company made a significant move of shedding Synchrony Financial from its business portfolio by selling Synchrony shares to the public with plans to spin off the remaining stake this year. Presently, GE is weighing to trim down its huge banking unit as investors have stayed wary regarding the financial arm. The announcement sent the company’s shares up 0.54% to $25.33.

GE CEO Jeff Immelt has undertaken the challenging task of winning back investors’ confidence in the company after it suffered a severe fall during the financial crisis due to its high exposure to the financial business. Investors since then have been critical of GE Capital and more confident about boosting the industrial segment. Stock prices have remained below $30 post the financial meltdown. The company is putting in effort to build its industrial segment and minimize its dependence on the financial wing.

A gradual shift from financial arm to industrial
Immelt has been working to scale back GE Capital after the segment exposed it to the difficulties during the global economic downturn. Ever since, the company has been withdrawing from GE Capital by selling the million dollars business in parts.

Last year, the company began selling its private label credit card company Synchrony Financial. GE also perceived that the appliances business wasn’t flowing well with the company’s structure in the last decade, but it had no option to sell off the unit for years after the financial crisis until last year when it decided to sell it to Sweden’s Electrolux.

Immelt has huge aspirations for the company and plans to lower GE Capital’s profit contribution to the company to less than 25% by 2016 compared with 42% in 2014. During the economic depression, GE Capital made for more than 50% of the company’s top and bottom lines. While cutting down on the financial wing, GE conversely wants to develop the industrial segment with stronger fundamentals. The American conglomerate has seven industrial segments: Power & Water, Aviation, Transportation, Oil & Gas, Healthcare, Appliance and lighting, and Energy Management.

A challenging task
With every passing year, GE is working to move towards its goals of becoming a bigger industrial conglomerate. But this isn’t an easy job. Immelt is under immense pressure to build GE as more of an industrial company than a financial business to reduce investor concern and regain their confidence. Despite consistent growth, GE stocks have been underperforming compared with fellow peers as investors perceive the company’s exposure to the finance business and lending operation as risky. Immelt told the company shareholders:

"GE Capital must enhance our industrial competitiveness, not detract from it…we see a significant advantage in our ability to bring financial solutions to industries like aviation, energy and health care. But make no mistake, the ultimate size of GE Capital will be based on competitiveness, returns and the impact of regulation on the company."

GE Capital recorded a revenue of $11.51 billion in the fourth quarter. There’s no doubting that pulling back from the finance segment would result in giving up on the Capital segment profit. But that’s required to ease investors. The commercial lending segment earned $2.3 billion in net income and made for $110 billion of GE Capital’s total loans of $237 billion in 2014. Considering that GE still earns a good portion of its revenue and net income from the lending arm, the shrinking could take some time. Also, GE’s financial unit is the seventh biggest bank in the country, so an abrupt closure could disturb the financial system of the economy.

Though GE stays committed to bring down GE Capital, it desires to operate a smaller banking business of extending finance for aircraft leasing, energy, and healthcare that shall fit well into the company’s industrial base.

A sound strategy and strong position
GE has some noteworthy potential that makes it a great proposition to long term investors. The company's strengths may be felt in several areas including its revenue growth, improvement in earnings per share, net income, attractive valuations and increasing industrial base.Ă‚