General Electric’s financial services division is earning inadequate profits and failing to cover its cost of capital, the group’s chief executive has said, raising the prospect of further disposals to cut the size of the business.
In his letter to shareholders for the company’s annual meeting next month, Jeff Immelt said GE Capital, the group’s financial services arm, would focus on improving returns and “returning substantial dividends” to its parent.
He said the future size of the division would depend on the returns it can generate subject to its regulatory constraints, adding: “GE is an industrial company first and foremost. GE Capital must enhance our industrial competitiveness, not detract from it.”
He also set out a defence of his personal performance as chief executive, saying he had “become a different leader” during his 13 years in the role.
GE Capital reported a 17 per cent increase in earnings from continuing businesses to $6.9bn last year, but its returns are still well below what GE earns from its industrial manufacturing and service businesses.
GE valued its holding in the financial services division at $82.5bn at the end of last year, implying a return on capital of about 8.4 per cent, compared to 14 per cent for its industrial operations.
Mr Immelt has set a target of reducing the share of earnings derived from financial services to 25 per cent of the group total, down from 42 per cent last year. That will be helped by the expansion of the industrial side of the company with the acquisition of the energy businesses of Alstom.
He has already been cutting back GE Capital, particularly on the consumer side. The most recent deals include last year floating the North American retail credit business Synchrony Financial, with a plan for a complete separation this year, and over the weekend announcing the A$8.2bn sale of its consumer finance operations in Australia and New Zealand.
Recently GE executives have suggested they could go further in selling or spinning off other parts of GE Capital.
Mr Immelt in his letter identified leasing operations that support GE’s products and services such as aero engines, healthcare equipment and power generation equipment as offering a “significant advantage”. He did not highlight any other GE Capital operations in the same way, which could imply that other businesses, even the US middle-market business finance operations, which have traditionally been seen as a core of the division, could be up for sale if their performance does not improve.
He said: “Make no mistake, the ultimate size of GE Capital will be based on competitiveness, returns and the impact of regulation on the entire company.”
The size of GE Capital means that it is one of only four non-bank businesses to be named as a Systemically Important Financial Institution by US regulators. The designation means that it faces tighter regulation and higher capital requirements.
For the first time since 2010, Mr Immelt also used his annual shareholder letter to talk about his own record.
He admitted that “after 13 years, it is easy to develop blind spots”, but said he had “surrounded myself with different people”.
He added that he had become a better risk manager and become “both more informal and more open”.
Since peaking at about $41 in September 2007, GE shares have underperformed the S&P 500 significantly, and stood under $25.50 by close of trading on Monday.
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