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February 26, 2014 2:19 pm
General Electric has drawn a line under its foray into consumer finance in Japan by agreeing to pay Y175bn ($1.7bn) to extricate itself from liabilities it assumed when it sold out to Shinsei Bank six years ago.
GE is recording the cost of the settlement in its 2013 earnings, on the grounds that although it reported those figures back in January, it has not yet made a formal filing of its results to the Securities and Exchange Commission, the US regulator.
The US industrial and finance group made an entry into the lucrative business of unsecured personal lending in Japan in 1994, enjoying several years of rapid growth as consumers got into the habit of taking out instant loans from unmanned booths.
But in 2006 the picture changed as Japan’s Supreme Court ruled that interest rates of between 20 and 29 per cent paid on consumer loans were “excessive”, unleashing a flood of claims for repayment by borrowers.
In September 2008, GE sold its consumer finance business, known as Lake, to Shinsei for Y580bn, while agreeing to indemnify the buyer for future interest-repayment losses above a threshold of about Y200bn. That agreement was due to run until the end of March this year, at which point GE had an option to exit altogether through a one-off payment to cover the unit’s estimated future losses for so-called “grey zone” claims.
GE’s decision to exercise that option, announced in Tokyo on Wednesday, marks a radical scaling back of its exposure to financial services in Japan, where foreign investors from Citigroup to Cerberus Capital Management have found the going tough.
The decision is also in line with a broader effort at GE to pare back the GE Capital business, which has been a drag on the parent’s balance sheet since the 2008-2009 financial crisis.
A person familiar with the situation said that GE’s payments to claimants ran to Y162bn in the three calendar years from 2011, when Lake’s losses met that threshold. The final payment of Y175bn should provide Shinsei with 5.2 years of coverage for future claims, said the person, based on about Y8bn of claims in the last quarter.
“The claims have been volatile and unpredictable and we did our best to forecast them,” said GE Capital. “Today’s agreement puts this issue behind us and ends our obligation to pay those claims.”
GE will report the impact of the agreement in its annual 10-K filing to the SEC, which is due by the end of the month. It will include a $1bn reduction in net earnings, reflecting the increase in the provision required to cover the $1.7bn cost for the settlement above what it had already set aside.
The adjustments will mean that headline net income, previously reported at $14.1bn, will now show a fall of 4 per cent rather than a rise of 3 per cent as GE said in January.
Diluted earnings per share will be cut by 9 cents from the previously reported $1.36.
The agreement had only a modest impact on GE’s shares, which closed up 0.12 per cent at $25.30 in New York. Shinsei shares closed 1.5 per cent lower at Y202.
Japan’s banks continue to be hit by claims that led to the collapse of two of the biggest consumer finance operators – Aiful and Takefuji – in 2009 and 2010, respectively.
On Wednesday, during a presentation to a conference organised by broker CLSA, Mitsubishi UFJ Financial Group confirmed that requests for interest repayment at its Acom subsidiary – the largest consumer finance company in Japan – were running at about 40 per cent of peak levels during the most recent quarter.
Last month Shinsei, Japan’s ninth largest bank by market capitalisation, trimmed its full-year net profit forecast from Y48bn to Y37bn, citing additional provisions for overpaid interest at Shinsei Financial (formerly known as Lake) and also at Shinki, a separate consumer finance business.
Even now, said Deutsche Bank analyst Yoshinobu Yamada, another round of provisioning seemed likely in Shinsei’s Aplus unit, a sales credit specialist, which has just 1.1 years of reserves compared with 3.8 years for Shinki.
“The industry had a very optimistic view, because they did not expect clients who had already repaid their loans to make claims,” said Mr Yamada, noting that lawyers across Japan continued to market aggressively, encouraging people to seek repayments within the 10-year time limit.
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