General Electric Company (NYSE:GE)
Business Update Call
December 2, 2008 8:30 am ET
Trevor Schauenberg – VP IC
Keith Sherin – CFO
Mike Neal – CEO
Jeff Bornstein – CFO
Bill Cary – COO
Kathy Cassidy – Treasurer
Jim Colica – CRO
Robert Cornell – Barclays Capital
Jeff Sprague – Citigroup
Nigel Coe – Deutsche Bank
Steve Tusa – JPMorgan
Nicole Parent – Credit Suisse
[Lee Rosenbaum – Unspecified Company]
Good morning ladies and gentlemen and welcome to the General Electric Financial Services investor meeting. (Operator Instructions) I would now like to turn the program over to your host for today’s conference, Mr. Trevor Schauenberg, Vice President of Investor Communications; please proceed sir.
Good morning and welcome everyone. Joanna Morris and I are pleased to host today’s call. We have posted a press release and presentation that we’ll be walking through today on our website. To view this please go to www.ge.com/investor. You can download a print to follow along. If you can’t see the file, please make sure you refresh your browser.
As always elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light.
For today’s webcast we have Vice Chairman and CFO, Keith Sherin, Vice Chairman and Capital Finance CEO, Mike Neal, and members of his leadership team including Chief Financial Officer, Jeff Bornstein, Chief Operating Officer, Bill Cary, GE Capital Treasurer, Kathy Cassidy, and Chief Risk Officer, Jim Colica.
After the presentation Keith and the Capital Finance team will be available for questions and answers. As a reminder we will present our total company outlook on December 16, as previously announced. Given this upcoming event, today’s session will focus primarily on GE Capital, so please focus your questions accordingly.
Now I’d like to turn it over to our Vice Chairman and CFO, Keith Sherin.
Thanks Trevor, this morning I’m going to cover a few overview charts and then I’m going to turn it over to Mike Neal and his team. Obviously the macro environment remains very challenging. The presentation we’re going to cover today is about GE Capital. We’re going to give you a lot of details about our operations, our funding outlook, how we feel about the loss environment, and our business model.
But just to give everyone an update on how the fourth quarter is progressing, I’d like to point out two things. First, the overall company fourth quarter results are trending towards the low end of the guidance range, in the $0.50 to $0.52 area. We don’t have any detailed update by business here today but that’s the overall outlook on how its shaping up right now as we look at the fourth quarter.
And second in addition to the fourth quarter outlook from operations, we’re evaluating restructuring and other charges to both accelerate the cost out and also to recognize additional losses in this current environment. Today we’re evaluating about a $1 billion to $1.4 billion after-tax charge and I’ll give you more details on that on the next page.
So the body of the presentation that we’re going to talk about today is all about GE Capital. We feel great about our business model. It’s a vital financial services business. We feel great about our funding plan. We’ve made tremendous progress over the last two months on funding and you’re going to see that today.
We’ve completed our 2009 budget outlook and right now we’ve created a framework to earn approximately $5 billion in 2009 and the team is going to take you through that. We do like our business model. We think we have unique competitive advantages and we’re going to show you how those fit.
And we have a strong fit with GE and a lot of the domain knowledge we get from the GE Industrial businesses.
At the same time the overall company is well positioned to perform in a difficult 2009 and at the end of the pitch after the GE Capital section, I’m going to cover a page on the dividend and how we think about the dividend and the contributions that GE Capital makes to the dividend.
To update the total numbers, including the restructuring and other charges that we’re anticipating and evaluating, the company is going to earn in total about $4 billion in the fourth quarter; a little more than $18 billion in 2008 overall.
Mike Neal’s segment, GE Capital Finance will earn about $9 billion in 2008 and overall Financial Services including the charges that we’re anticipating will earn about $8 billion during 2008. The next page is about the additional fourth quarter charges.
We know that we have to reduce our cost structure in this environment. We’re trying to get ahead of that. We’ve decided to look at the projects that we can execute to reduce our costs in 2009 and get them started as fast as we can.
We’re going to look at headcount reductions in both Financial Services and Industrial. We don’t have any announcement about headcount reductions today. We’re going to have that done business by business on a local basis.
We’re also looking at some Financial Services portfolio exits that might result in losses including all the different transaction costs associated with the exit. There’s no one large item we’re anticipating here but maybe involving $3 billion to $5 billion of asset dispositions.
We’ll be taking costs out by reducing the number of facilities, by reducing our number of profit and loss structures in the organization. We’re also going to recognize the tougher loss environment going into 2009.
We talked to you in October about our loss forecast and today we’re going to give you an update that we’re going to accelerate the loss provisions in the fourth quarter and also be at the high end of the loss provisions in 2009 and we’ll take you through the details of that.
We still have to finalize the fourth quarter. We have a lot of work to do to round out these projects and get the specific numbers but approximately 70% of this additional fourth quarter charges will be associated with the Financial Services business.
This is going to help us lower our cost structure. We’re going to move quickly and deal with some of the loss pressure that we announced in the third quarter earnings call and this will really help us position for a tough 2009.
Next is an update on our actions around maintaining the Triple A rating. On the 25th of September we outlined our steps to improve our liquidity, strengthen our capital base, and remix our business model.
We’re going to give you an update on all of those today. On the right side are some of the further actions we’ve taken that really strengthen our position. You know we raised the $15 billion. That immediately improved our liquidity. We’re going to use that to protect the leverage ratios at GE Capital.
We’ve also gained access to two important government programs that Kathy is going to take you through. We’ve refined our business model. We’re going to have a terrific focus on core growth. We’re going to be able to redeploy cash from some of our runoff portfolio and Mike Neal and Bill Cary are going to cover that, and that’s going to enable us to reduce our need for long-term debt in 2009.
Previously we communicated that we have about $66 billion of long-term debt maturities and that we were going to anticipate refinancing about $60 billion of that next year. Today in this [plane] we’re going to show you that our needs have been reduced to about $45 billion and we may even prefund some of that in 2009 based on the TLGP program and Kathy is going to show you those details.
We also have reduced the target for our CP balance down to $50 billion by the end of 2009 and we’ll have 100% bank lines coverage. We’re going to increase our alternative funding. We’ve done a great job with deposits this year and we’re going to continue that in 2009 and Kathy is going to take you through those points.
And finally we’re committed to reducing our leverage. We’ve committed to the 7:1 leverage at GE Capital including our hybrids by the end of this year and going to 6:1 by the end of next year and right now we’re evaluating a $5 billion capital infusion from the money that we’ve raised based on what we need to make sure that we meet the 6:1 leverage.
That’s primarily driven by foreign exchange so we don’t really know what the right number is today. We’re going to have to work our way through it as we get to the end of the year here, but we’re definitely going to meet the 7:1 leverage ratio.
The team is going to cover this in more detail but we feel great about the progress that we’ve made over the last two months.
Finally one chart on our GE Capital business model, we compete very effectively with our model. We use capital as raw material. We have an advantage there with the Triple A rating. We’re very effective at managing the factory and Financial Services. We’re low cost. We have great risk management and we have a centralized treasury organization. We’re very good at asset management. We get great tax benefits when you combine GE and GE Capital together and we have terrific distribution advantages.
We have over 15,000 global originators and we have great GE domain expertise. We’ve laid this out that before the financial crisis we maintained above average performance over a long period of time over the last 20 years because of these advantages, scale, margins, and results have far exceeded what we’ve seen in banks and other FinCos and we have great brand and domain capability.
And our presentation today is that while over time we significantly outperformed we’re going to take you through the details of how we think about the business model today and even past this crisis and how we feel about it and we’re going to show you how we’re positioned to continue that outperformance as we go forward and we’ll come back to this at the end.
With that let me turn it over to Mike and the team and go into GE Capital.
Thanks Keith. Just to start out GE Capital is and has been a strong financial services franchise. We’ve been a great source of liquidity this year including third and fourth quarter, $120 billion of new financings to US companies, projects, municipalities; $245 billion on new credit extended to US consumers; opportunistic deals this year with both Merrill and CitiBank; contributed to support all major US airlines, auto companies, an important source of liquidity in these troubled times.
And one of the leading restructuring finance companies. If you look to the right side of page seven you can see some of the markets that we’re in; middle market commercial lending, equipment, aircraft financing, health care, fleet leasing, very strong positions in all of these markets in the US and of course strong positions in these markets globally as well.
A strong core and we believe competitively advantaged. If you look at page eight, very profitable business. In 2007, $12.2 billion of net income. This year in a very difficult market somewhere around $9 billion of net income. Importantly too $50 billion of new fundings in the fourth quarter so we are active in these markets.
If you look at the bottom left of this page you can see that we compare well in a difficult market with a group of people that we do compete with and against. In terms of our focus for the company, safety first. That’s really how we’re thinking about the business. We have to manage through this current cycle in a safe and responsible way.
We have to reposition our funding model and Kathy in the next section, because I know you’re interested in that, will quite a bit of time walking through how we’re thinking about that and of course we’re in a very difficult credit cycle as well and we have a section in here that Jim, Jeff, others will spend quite a bit of time letting you know how we think about these cycles and how we manage through this.
Secondly on this we have to reposition the business as a well-funded but smaller financial services company on a going forward basis. Our plan for next year 2009, is to continue to outperform and reposition the business for growth in 2010 and going forward.
With that, Kathy if you could, I’d like to turn it over to you and we can talk about funding.
Thanks Mike and good morning. Given the challenges in the market over the last few months, one of the things we did was we took a step back to assess our future funding capacity and built a plan for a diversified FinCo for the long-term on a conceptual basis.
We began by thinking about our potential size, based on our projected capital base three years out, we went through a thorough assessment of funding sources to come up with what we view as a safe funding model.
So if we look at the funding sources the first piece which is actually already in place, is our very long-term debt which matures in 2016 or later. As you can see we have about $85 billion in place. This includes our hybrid debt and for us this is a stable source because its already out there and we don’t need to deal with it for a number of years.
Next we took a look at the two markets where we’ve traditionally been a very large global player of scale; the long-term debt market and the commercial paper market, and we assumed that both markets would be declining going forward.
On the long-term side, we felt comfortable building a plan with issuance of about $50 billion a year with an average life of about five years. This would equate to about $250 billion of funding capacity. Now this issuance would be down about 40% to 50% from what we’ve done in previous years and given that we issue in about 20 different currencies around the world, we feel pretty comfortable that the market will support us at this level.
We then looked at our CP program and we cut our program in half and decided that we’re going to back it up with 1005 bank lines. Finally we took a hard look at our deposit capability and our alternative funding and given that we already planned to be at about $57 billion at the end of this year, felt comfortable building a plan a few years out for about $85 billion and we think we actually have some upside here.
If you all this all together we believe we can support about $470 billion of liability funding over the long-term. Our new model is safer, it has more capital, 6:1 leverage versus pre-crisis 8:1 leverage, its more diverse in funding sources, and smaller in size and its still cost efficient.
So with that as a conceptual strategic backdrop, we’ll now turn to the tactical side of where we are today. Given the challenges in the capital market this year, I thought I’d first go through a few important government programs which are helping to restore investor confidence and liquidity in the market.
GE Capital is participating in several of these. So if we start with the commercial paper funding facility, we’re using this to support our investors’ liquidity needs and manage duration. We think it’s a program that’s helpful for issuers as well as investors and since its launch we’ve seen investors extending the duration of CP that they buy because they’re confident of a bid for their paper in case they need to handle increased redemptions.
Although this is just a small piece of our overall commercial paper outstandings we think its been helpful for the market as a whole and we view it primarily as a liquidity backstop. The second program which is the TLGP, this opens up access to a whole new market for us; investors who have traditionally bought government and agency bonds.
You can see that we have capacity of about $132 billion under this program. What this does for us is really solidifies our debt issuance capacity for 2009 and it improves our long-term debt pricing and CP market access in a very difficult environment.
But most importantly I think both programs really allow us to be on a more level playing field with financial institutions both in the US and globally as the governments have stepped in to support them around the world.
One program that we’re not participating in is the TARP program. We’ve raised $15 billion in common and preferred equity and that money, as Keith said earlier, is available if GE Capital needs it to hit its target leverage.
So all in all, I think these programs are very helpful in leveling the playing field for GE Capital.
On the next page what we present is an evaluation of where we think the markets will be in 2009 and we’re building our plan pretty conservatively and assuming the markets will continue to be challenged.
Although we do think that some of the government programs are helping to really restart the debt market. The first thing we’ll look at is the US commercial paper market which includes both unsecured issuance as well as asset-backed commercial paper. You can see that it’s down from its peak of $2.2 trillion which was reached in the summer of 2007.
This market is important to investors who look to invest their funds in something other then time deposits or overnight in banks to pick up a little more yield. Buyers have traditionally included money funds, state and local governments and corporates, who invest from overnight out to 270 days.
When the reserve fund first broke the [buck] back in September, many money funds suffered some huge redemptions causing many to request early buyouts of long-dated CP. But we’ve seen that those requests now have really diminished.
CPFF and other programs have really allowed this market to stabilize and some term buying to resume. But we still assume that the market is going to be flat in 2009. You can see from the chart that we’re cutting our own outstandings back to about half the size we were in 2007.
Now if we turn to the global investment grade term issuance market, you can see that volume is down in 2008 and we are planning for yet a smaller size in 2009. The $1.3 trillion issuance that we’ve shown here would roughly offset maturities that are coming due next year.
As you know the market is [bald] for now but we think that the TLGP opens us access to a different buyer base, investors who traditionally bought government and agency paper, and as you can see that market is about $6 trillion.
So as the credit markets slowly improve, there’ll be pricing more robust market making by broker dealers and investors regain confidence in issuers, we think that the opportunity for issuance of longer-term unguaranteed debt should open up.
We believe that there will be demand for high quality debt such as ours as we go forward. We’ve only targeted $45 billion which is half of what we did in 2007 so we think our plan is pretty conservative.
Now if we go into our 2009 funding plan on the next page, you can see that we built the plan based on reduced reliance on wholesale funding, a smaller balance sheet, and diversification of our funding sources.
Our commercial paper will be down by about $38 billion from third quarter 2008, the $50 billion and that will be 100% backed up by bank line.
We put our plan together for 2009 as I said earlier assuming $45 billion of long-term debt issuance next year versus maturities of about $68 billion. When we look at reliance on wholesale funding, our long-term debt in our commercial paper will be down on a combined basis from third quarter 2008 by about $75 billion by year-end 2009.
We accomplish this by shrinking our asset base or what we refer to as ENI or ending net investment, by $45 billion from third quarter 2008 to fourth quarter 2009, by increasing our retained earnings and by growing our alternative funding.
We put the plan in place assuming the government programs will end as scheduled and that the pricing on new originations will offset cost of funds pressure. Now I’ll spend a minute on each of these three funding buckets.
First we’ll look at the commercial paper market, and we’ve had great support from our CP investor base this year. As many of you know we are the largest issuer of CP in the US market, go to market with our own sales force, and have a broad and deep investor base.
To date we’ve made limited use of the commercial paper funding facility with the majority of our portfolio being [head] by our global institutional investor base despite the market disruptions that have occurred this fall.
Since the introduction of the CPFF markets have improved and we have restored our US weighted average maturity to our 55 to 65 day target as investors have resumed more term buying. On the bottom left side of the chart you can see our US portfolio cost.
Our pricing has followed LIBOR down and our issuance cost this year has been approximately 30 basis points or so below LIBOR. As we think about liquidity and safety we’re going to continue to shrink our size in this market to $80 billion by the end of this year and $50 billion by the end of 2009.
I think we have a clear advantage in markets where we issue directly so we’ll want to make sure that we preserve our size in these markets as we go forward.
On the next page, we lay out our long-term debt plan and our plan in 2009 is to fund approximately $45 billion in long-term debt markets. We believe that the TLGP will reopen the markets for financial institutions. In fact we’ve already seen evidence of that as many issuers began coming to market under the new program as soon as it was announced last week.
The government guaranteed program appeals to investors who have traditionally bought government and agency paper and we plan to make use of the program ourselves given the attractiveness of the pricing even after fees.
We’re looking to launch a deal under the new program this year as Keith mentioned earlier. This will give us flexibility to prefund next year’s issuance or pay down CP quicker. We also plan for longer-term unguaranteed issuance in 2009. This will allow us to reestablish our longer-term debt-pricing curve and maintain our match funded book.
You can see our cash spreads in the secondary market in the chart on the bottom. We have increased along with bank and FinCo indexes. While we will likely pay higher spreads then we have historically we are getting price on the asset side to offset this increased cost.
So the third bucket is our alternate funding and we’ve made some great progress in 2008 in diversifying our funding and we look to continue to drive these programs as we go forward. If you look at the dark blue boxes on the bottom you can see that our deposits in our international banks have grown by over $3 billion this year and we look to continue this strong growth in 2009 and beyond with a goal of more self-funding for our banks.
In fact, our actual internal target is to do better than this. In the US we’ve introduced certificates of deposits which are sold through a large broker network. From an insignificant amount in 2007, we’ve grown usable deposits to support our assets to over $20 billion in 2008 between our US thrift and our ILC.
As we grow our asset base in these two entities, we will continue to grow our CD issuance in 2009 and beyond. We currently offer CDs ranging in maturity from 90 days to 10 years. Our FSB houses a piece of our private label credit card business as well as our sales finance business while our ILC houses or will house our bank loan group, our distribution finance business, business properties, and franchise finance.
Other alternative sources of funding include mostly business specific debt supporting our project finance in aircraft businesses, as well as bank loans in mostly overseas markets. We’re also exploring thrift opportunities to increase our deposit base.
Our objective here is really to use our bank’s capability for more deposit funding as we go forward.
So now I’ll take a minute and talk about cost of funds, and if you look at our overall cost of funds in our US dollar portfolio, you can see that costs will decline in 2008 and 2009 due to benchmark rate cuts. So as the Fed Fund’s rate declines, despite widening of spreads on newly issued debt, our actual rate should fall.
Since we’re downsizing our portfolio there’s a reduced impact from new higher priced debt. About half of our debt portfolio is fixed rate and match funded with same duration assets. As we add new fixed assets the debt that will go along with them will be higher in price but higher asset pricing should offset the impact.
The other half of our debt portfolio is floating rate and subject to repricing just as our floating rate assets are subject to repricing. If you look at our debt, which is subject to repricing, you can see in the bottom chart that roughly 30% of our debt stack will reprice as maturities fall off in 2009.
So for example with our commercial paper portfolio, our $50 billion portfolio at year-end 2009 will cost somewhere between LIBOR less five, which was our historical issuance cost, to LIBOR less 30 which is what we’ve experienced since the financial crisis began in August of 2007 to today, reflecting the flight to quality that the market has taken.
The second bucket is our deposits and we’re actively adding deposits to our funding mix. The cost of deposits has been running between 30 to 200 basis points over LIBOR depending upon the maturity of our CDs which runs from three months to 10 years.
And lastly, the repricing of our long-term debt of $45 billion will depend on whether its done under the guaranteed portion of TLGP or longer-term unguaranteed issuance. What’s important here is that our business teams have focused on strong pricing given these assumptions, and we’ve increased return hurdles to capture margins on any new business.
Most importantly we are and will remain competitive.
On the next page, we’ll focus on our capital leverage metrics. As Keith talked about earlier we’re committed to reducing our leverage and based on this chart you can see our targets; 7:1 leverage in 2008 and 6:1 in 2009.
We’ve also shown what hitting our targets will do to some other leverage metrics such as debt to tangible equity and assets to tangible equity, which we know investors track. A few facts surrounding our metrics; GE Capital already has lower book leverage then many of our peers and while this does include goodwill, we have other processes for evaluating whether or not that goodwill is impaired.
We think our leverage ratio is appropriate for our business model. We have lower loss rates then banks, we have a portfolio that’s mostly secured, we have vast asset management capabilities, and we have a history if integrating successful acquisitions.
We think this target of 6:1 leverage is achievable through continued profitability of our financial services businesses with a lower dividend paid to GE. Our smaller size will also help. That said, as Keith mentioned earlier, we’re evaluating a $5 billion contribution to the GE Capital.
So with that I’m going to turn it back over the Mike Neal.
Thanks so much Kathy, in summary we’re convinced that we can be a well funded yet smaller finance company. We can be competitive safe, with a much more diversified funding model. We believe that we are participating in the appropriate government programs that we need that level the playing field for us and doing that without the need to become a bank holding company.
Now what we’d like to do is spend quite a bit of time talking about risk and how we think about risk in this most difficult market I’ve seen in my career. We think that we have a plan and a business performance that can outperform in this market but we want to spend a lot of time on that today and Jim Colica, our Chief Risk Officer, and Jeff Bornstein, our Chief Financial Officer will take the lead on that.
Thank you Mike, well that’s true, it’s the toughest credit cycle in the last 20 years and in my experience with GE Capital.
So in that context its important to note what we are and what we are not and how we approach portfolio risk. One, we underwrite all loans and leases to our on-book standards. We are senior, we’re secured in collaterals that we have over 20 years of experience with. We’ve stayed away from originating exotic, structured investments and securities trading.
And we’ve exited several high-risk business lines and we’ve reduced volume significantly in some higher risk consumer finance areas. Now across the entire portfolio for the entire year of 2008 and back into 2007, we’ve tightened our underwriting parameters to reflect these deteriorating credit conditions.
On the next page is a pictorial of our risk process across the entire financial services business. The risk process incorporates multiple levels of focus starting at the field level which is closest to the market and to our customers, and proceeding all the way to the GE Board of Directors.
The GE Capital Board of Directors sets investment approval authorities which are low by industry standards and risk limits and the GE Board also monitors our risk process and performance. As the Chief Risk Officer, I approve investment parameters for each product in each market and our 6.0 process monitors performance on a monthly basis.
All acquisitions are approved by the GE Capital Board and I meet regularly with Jeff Immelt to review transactions that are presented to the Board and to discuss general market and portfolio risk issues.
[break in audio] perspective, what their relative size to the portfolio is, our assumptions for 2009, and what we think our estimated pre-tax losses are as a result of that.
We also laid out what we think the downside case is to give you some context around our assumptions in total. First I’ll start with US consumer, which represents about 7% of total assets, we’re assuming 8.5% unemployment by year-end 2009 which will drive approximately $4 billion of pre-tax losses in our plan for 2009, which is about a 20% increase from where we think we’re going to end 2008.
Our downside case is that unemployment reaches 9% by year-end 2009 which would add roughly $800 million in additional pre-tax losses.
The UK mortgage business is 4% of our portfolio and in 2008 home prices fell 17% and we’re assuming another 15% decline in 2009. That results in an expectation of about $600 million of losses in 2009, up approximately 90% from 2008.
Our downside case is a 20% home price decline next year which in combination with the 2008 experience would mean 37% decline over that period of time. That is equal to the largest peak to trough cycle that we’ve seen in the UK housing market in the last 20 to 25 years and it would add about $200 million in additional pre-tax losses.
Next our real estate debt and equity [inaudible] represents 14% of our portfolio. Next year we expect average cap rates to increase 50 to 100 basis points resulting in approximately $500 million of losses and equity impairments and that would be up roughly $220 million from where we think we’re going to end 2008.
The downside case is 200 basis point increase in cap rates with the highest historical cap rates by asset type which would increase loss and impairments by another $400 million of pre-tax.
And finally GECAS our aviation leasing business which is 7% of the portfolio. In our base case we assume global traffic will be down 1% to 2% and that at least one major airline will liquidate and that we think results in approximately $300 million of pre-tax losses and impairments next year.
The downside case assumes 3% traffic decline and just to put that into perspective, the worst decline we’ve ever seen in a 12-month period was 2.5% and that was post 9/11. We also add that not just one but two major airlines would go into liquidation. And in that downside scenario, credit costs and impairments would increase $250 million to about $550 million.
We’re going to go through each of these portfolios in a bit more detail with Jim but I think we have a well-grounded view of what’s in front of us in these businesses. I think we’ve dealt with a range of outcomes in our 2009 framework.
Next I just want to walk you through our view of losses and reserves for the entire portfolio. On page 24 as you can see on the top left, we’ve enjoyed a fairly benign loss environment but expect losses to increase to about $7 billion pre-tax in 2008 or up about 64% year-over-year.
And then we expect to increase again in 2009 based on the assumptions I just walked through with you to approximately $9 billion. With the higher losses the reserves will increase as we’ve laid out below to approximately $6.6 billion by the end of 2009.
Historically commercial losses would be expected to lag consumer losses but in this credit cycle that lag will likely be much shorter. The other point I wanted to make is what I didn’t cover in the previous page is our assumption around the bank loan business.
We have in our outlook defaults increasing to 7% to 8% in 2009 from today which is about 2.9% in 2008. You may see some external estimates that have a much higher default range but our portfolio is almost entirely senior secured and we don’t have high yield and don’t originate mezzanine debt and that’s why we think on the outside case here, we got 7% to 8% default rates next year.
With that, Jim is going to walk you through in more detail key parts of the portfolio we talked about.
Thanks Jeff, turning to the US consumer book, the US consumer portfolio is highly diversified. It has 56 million active cardholders across the country. Private label credit card portfolio has low average balances which helps to mitigate the loss severity for any single default and in addition we have loss sharing arrangements with our major retailers.
Now in 2007 we recognized consumer credit trends were deteriorating and took several key actions to reflect this environment and I want to share those with you on the next slide.
First we upgraded our proprietary scoring models to include more qualitative as well as our quantitative factors based on our credit experience in this cycle. We lowered initial credit lines for new customers. We eliminated or reduced credit lines for inactive and active cardholders and raised approval cut-off scores.
We exited the motor home and marine segments of our sales finance business that were under stress. We added 1,300 collectors and increased training in areas such as debt restructuring. As a result of these actions our 2008 vintage book is performing very well.
Our consumer mortgage book is international, not US, and is predominantly in three markets; the UK, Australia New Zealand, and France. GE employees underwrite each mortgage and we hold all mortgages on book.
We have no delegated underwriting to outsiders. Although overall 30-plus delinquency has been high historically which primarily reflects the UK book, losses have been very low. Now because of the UK recession we are planning for house prices to decline through 2009 as Jeff said, 500 basis points more then the 27% decline experienced in the early 1990s, which is pretty significant and we think very conservative.
Despite this severe price decline assumed the combination of mortgage insurance, for loans above 80% LTV, and a portfolio LTV of around 78%, based on current lower home prices should help loss severity remain manageable even as defaults increase.
We also took UK volume down 60% this year and 2009 volume will be less then $1 billion. The Australia book is substantially prime and is mortgage insured to the first dollar loss which is customary in that market.
The portfolio is performing well with 30-plus delinquency at around 4%.
The France book is 85% prime and also mortgage insured above 80% and 30-plus delinquency in France is around 2%.
Turning to GE real estate, our real estate portfolio is highly diversified; over 8,600 properties in 2,600 cities in 28 countries and an average investment under $15 million.
Over the last 20 years we have maintained strict underwriting standards with a seasoned team of 400 professionals. For example, our in-house experience valuation team develops each property valuation which is at least 10% more conservative then a third party appraisal.
Almost 60% of the debt book is in cross-collateralized portfolios providing added collateral protection. We also have a team of about 600 asset and property managers who operate our real estate with a hands-on property-by-property approach.
Turning to the debt portfolio the core debt portfolio is very diversified as well across property types and about 45% is outside the United States. A $10 billion owner-occupied portfolio is in runoff. The loans are first mortgages with minimal construction risk and the 70% loan to value and 1.6x debt service coverage should provide a cushion for many declines in occupancies and rents.
Scheduled maturities in 2009 are less then 15% of the portfolio and 70% of those maturing loans are less then 80% loan to value based on current values which reduces the refinancing risk and portfolio performance is excellent.
The equity portfolio is also broadly diversified across 3,200 properties in 150 markets globally with a minimal construction risk and an average investment of $11 million. About 70% of this portfolio is outside the United States.
The 6% yield covers our carrying costs and the annual depreciation of almost $1 billion reduces our exposure over time. Both these factors combine to provide a cushion against declining values and even in this difficult end market environment we have sold $5 billion in properties so far this year.
Our commercial aircraft portfolio is in excellent shape going into the next cycle comprised predominantly of young, desirable narrow-bodies, A320s, and 737 new generations. The business is placed with other customers over two-thirds of its fleet coming off lease and 100% of its new order book.
Through the last severe down cycle in 2001 and 2002, GECAS demonstrated is global redeployment capabilities with fewer then 10 aircraft off lease throughout the period. Now the smaller regional jets and older 737s could be at risk to the airlines’ reducing capacity, but the business is taking actions now to redeploy and manage these assets.
Now Jeff will talk about our approach to asset impairment.
I wanted to cover two more areas before I turn it back to Mike to wrap up the risk discussion, first is how we think about asset impairments and our valuation processes and then on the following page a quick discussion about off balance sheet securitization.
So first here on the top left are the major categories of assets that we evaluate for impairment. To the right of that the amount of investment as of the third quarter and then how often we review our investments for impairment and the primary accounting model that we use when making that evaluation.
For retained interest and securitization, debt securities, and our insurance investment portfolio, we review our positions for other then temporary impairment quarterly. And if an asset is deemed to be other then temporarily impaired then we write it down to fair value.
In the case of real estate owned, equity investments, equipment leased to others, and goodwill, we review valuations at least annually but any asset in those categories that is temporarily below our basis are reviewed quarterly for a permanent impairment or if there has been some relevant change that would have us reanalyze our carrying values.
For example in aviation, if the lease rents and current view of residual value do not recover our basis in an aircraft then we immediately write the plane down to current market value based on external appraisals.
We have a detailed and rigorous process for reviewing valuations with a series of reviews and escalations that start at the business unit level and then are reviewed through the leadership team, our corporate accounting team, as well as our audit staff and external audit firms.
Through the third quarter of this year we’ve recorded above $700 million of pre-tax impairments and we’re expecting a similar kind of profile for next year. Then finally although not subject to impairment on the bottom left we wanted to give you some sense of the assets that are subject to mark-to-market which are less then 2% of our total assets.
They are primarily comprised of equity [self] trading like [Genpak] and a portion of our consumer retained interest and assets held for sale. If you go to the next page, I wanted to briefly cover off balance sheet securitization.
As of the third quarter we had $50 billion of outstanding securitizations which is down slightly versus the end of 2007. You can see the major collateral types here on the left, we have credit card receivables being the biggest. I just wanted to give you three quick thoughts.
First is for capital adequacy and rating agency leverage metrics securitized assets are added back to the balance sheet so its considered in our capital [adequacy]. Second, all these securitizations achieve true sale treatment and so our continuing exposure is limited to the $6 billion of retained interest that we have on our balance sheet.
We have only one program where we provide liquidity support of about $2.3 billion to a sponsor in the event that sponsor has market access issues, so very little continuing involvement that’s outside of our $6 billion of retained interest.
And finally these securitizations are market securitizations, they don’t include SIVs or CDOs or other very highly structured transactions, very straightforward transactions and structures that we’ve been using for years.
So with that I’ll turn it back to Mike.
So we believe we have the company well positioned and positioned appropriately for what’s going to be a very difficult cycle. Reserves are 2x what they were in 2007, substantial resources are involved with many being shifted from offence to defense, adverse credit impact is well understood and incremental.
There is always the risk that markets could be worse then we’re forecasting but the result will be incremental rising losses not a cliff. We do not foresee any unplanned or large exposures that might surprise suddenly.
What I’d like to do in the next section is spend some time describing how we are repositioning GE Capital as a more focused yet smaller finance company with a conservative funding program, a business that can outperform in 2009, and is positioned for growth as markets improve.
We are segmenting GE Capital into three segments; a core finance company of about $350 billion, that is focused on mid-market customers that benefit from our domain knowledge in vertical markets; a business with attractive returns that we know well that takes advantage of our core competencies.
This business is highly competitive and can grow for the long-term. A second business that we call GE Global Banking of about $90 billion that has attractive returns and consists of many of our banks and joint ventures.
These banks and joint ventures are quite attractive, many in emerging markets with large deposit bases and strong local competitive positions. Our plan here is to enhance their value; Bill Cary will talk more about this in a minute.
And lastly a collection of platforms that we plan to exit, platforms that attract too much leverage for our conservative model and tend to compete head to head with the banks. These platforms will be restructured, sold, or run off over time.
The earnings power of this smaller lower leverage model is roughly $5 billion in 2009 and returns to double-digit growth in 2010. We have a conservative plan for 2009 that has higher losses and fewer gains.
A collection and volume plan that assumes no first half improvements and fully considers customer refinancing risks, a plan that assumes new volumes at higher return, a plan that has aggressive but doable cost-out plan of $2 billion pre-tax, and lastly a plan that positions our core business and Bank Co. for longer-term growth.
I’d like to turn it back over to Jeff.
I’m briefly here going to walk you through what we think the earnings dynamics are in our 2009 framework. There are five major earnings levers in the business and the first is the portfolio and these are the assets that we own and we originate in the coming year.
We expect earnings from the portfolio to be flat to down about $1 billion driven by roughly a $25 billion of fewer earning assets but that will be offset partly by remixing from lower return runoff to much higher return new volume based on the pricing dynamics that we see today.
And even with a higher cost of new debt issuance that Kathy talked about, at the longer maturities, we are very confident that we can generate volume in excess of 2% ROI.
On the gains line we will be lower in 2009 primarily driven by lower expectations in the real estate business where we think gains will be down about $1 billion versus 2008. In total for the business we’re planning on about $1 billion in gains which will be down from approximately $3 billion in 2008.
And we just think in the current environment its hard to know when liquidity for assets is going to return and so we think this is the right way to think about the plan for 2009. Losses I think we’ve covered here but as we discussed, they’re going to be higher in 2009 and we think we’ve built a range here on how we think about what those will be that has a grounded base case, but recognizes there’s a downside scenario that we can deal with.
And Mike just alluded to the SG&A costs and our plan to get $2 billion of pre-tax out. Our costs will be lower by over $1 billion net on an after-tax basis and we have plans in place and actions in process that will achieve these savings. These programs are a combination of lower employment, less indirect expense spend, and a leaner organization and Bill is going to walk you through a bit more of those details.
And then the last lever is really around tax and we’re planning for lower tax benefits with much smaller assumptions around tax planning for 2009. We are expecting a much lower execution of tax advantage transactions given the environment we’re in.
So I think in total when you go through these five levers, we feel pretty good that the framework gives us a range that has us earning approximately $5 billion in 2009 and is reasonably grounded.
Thanks Jeff, I’d like to give you a feel for how we’re going to invest in new business in 2009. As you can see we plan to fund about $200 billion in new volume next year and you can see also the forecast for collections and new volume by quarter on page 39.
We collect somewhere between $50 billion and $70 billion in each quarter and have allocated volume by business line based on those collections to ensure we manage our total outstandings and at the same time optimize our returns.
We’re planning for sales and securitizations to be down about 20% in 2009 to about $25 billion and while that may sound like a lot, even in the toughest days of this year, we completed over $11 billion in sales and securitizations in the second half of 2008.
Lastly while we think we’ve planned prudently, we have a funding hedge of about $10 billion in our back pocket to manage any disruptions that we might see in the marketplace. We feel pretty good about our plans around both collections and our forecast for new volume.
Speaking of volume, turning to page 40, this gives you a look at the return profile of two of our businesses; first capital solutions and then on the right hand side of the page our corporate finance business.
Let me ground you on the chart, the dark blue line represents the total margin of the portfolio in each year and the light blue line is the margin on new loans originated in that year, so new volume.
As you can see new business margins have increased dramatically since 2007 and as the portfolio turns over our earnings power in this total book increases. Now we’ve shown you the expected numbers for 2009 and its safe to say that that trend of margin expansion will accelerate into 2010.
You can also get a feel for the dynamics by the individual business units within capital solutions and corporate finance on the bottom half of the chart to give you a little more color around the businesses.
As Jeff mentioned, another key element of our 2009 operating plan is operating expenses or cost, we plan to reduce our operating expenses to approximately $12.5 billion, down $2 billion pre-tax from 2008 levels.
We actually highlighted this goal several weeks ago when we announced the new GE Capital organization and we have detailed cost plans by line of business that actually exceeds the $2 billion target.
Now there’s no surprise around the major drivers of the cost out here, first we’re consolidating headquarters both between GE money and GE commercial finance as well as geographic consolidations within the new business units.
As we focus and consolidate our businesses particularly in our restructuring group, we’ll need fewer resources, resulting in lower costs.
Lastly a small piece of the pie is the exit of low performing business units much of which we’ve already started in the latter half of 2008, though we’ve conservatively built our plan assuming we can sell little in the way of businesses in 2009.
So the last few pages, while quick, hopefully give you a feel for how we’re thinking about new volume, up over $200 billion in new originations in 2009 at what we think are pretty compelling returns. Margins as you can see from the example from cap sol and corporate finance up nicely as our portfolio turns and we continue to originate higher returning new leases and loans and then lastly, the cost piece, the $2 billion improvement year-over-year in our operating expenses.
What you’ll see on the next three pages is a look at the three broad business categories that make up GE Capital going forward. Starting first on page 42 with the core FinCo, this is the group of businesses that are primarily focused on commercial loans and leases but also includes our retail consumer credit platforms in the US and Australia, as well as our verticals, energy and energy specialist businesses are in this category.
These businesses are distinguished by great origination, a track record of a strong underwriting and portfolio management, and unique competitive differences from either our bank or increasingly weak peer play finance company competitors.
Now lately we’ve had questions about the impact on our business from all the bank consolidation but for those of you who have followed us for a while, you’ll recall that bigger banks don’t necessarily translate into better banks, particularly in the spaces where we compete.
We expect to end 2009 with ENI of about $335 million in this segment and we’ll see that grow 5% to 10% into 2010. Earnings will be in the $3 billion to $4 billion range next year and should grow faster then assets in 2010 at nice returns.
If you turn to page 43 this is a summary of the global GE Banking operations. This group is composed of both our wholly owned banks as well as our bank joint ventures. These businesses have a very unique attribute; they either are or can fund themselves using deposits in their individual markets.
Now historically we have not used this capability to the fullest extent. In fact only about 20% of our funding needs come from deposits today in these businesses. We have increased the emphasis on this in all of our deposit-taking institutions and expect that ratio to exceed 50% by the end of 2010 and as Kathy mentioned, we actually see some upside in that as well.
Again while that sounds like a big number we’re talking about modest share gains in markets where we’ve got a branch presence of over 900 branches and small share gains in markets where we’ll tap deposits through wholesale channels similarly to what we’ve accomplished here in the US with our thrift and industrial loan company.
In addition these banks are concentrated in faster growing markets in Central Europe, Asia, and Central America; all places where we see good economic growth and continued opportunity and credit expansion in addition to deposit funding.
We expect to pare our base slightly in 2010 and see 2009 earnings of a $1 billion to $1.5 billion next year. The last page that I’ll cover is 44. This gives you a look at the glide path we see for our restructuring group assets.
This group includes our equipment services businesses, most of our consumer mortgage books, and a dozen small or subscale commercial and consumer platforms. We’ll end 2008 with a little over $100 billion in assets in our restructuring group and expect to see normal runoff bringing that balance down to about $40 billion by 2011.
If the markets improve and we think they should over that period, we can accelerate the runoff even faster. Its important to note that while these assets are lower returning, they are profitable so while we’d like to move them faster so we can get those assets into the kind of returns I showed you in the core, there’s nothing on fire here so there’s no immediate sense of urgency.
As you probably know as part of our recent reorganization, we’ve appointed a big GE leader in fact a GE Senior Vice President, to manage this process and we feel good about our ability to reduce the investments here.
So with that I’ll kick it back over to Mike.
Thanks Bill, so in summary the drivers of our framework for 2010 net income are improving new business margins; driving a positive mix shift in the portfolio with improving spread income versus gains; a lower cost base driven by 2009 actions that will have a full year’s benefit in 2010; a credit cycle that is hopefully improving but whatever the market we’ll be well positioned to manage our way through it.
We believe this will get us back to double-digit growth for 2010 and beyond. On page 46 and you saw this page earlier but I think it’s a good page to end on. We’ll have a smaller yet more focused business model. We’ll have a competitive but more diversified funding.
We’ll continue to have advantages in what we think of as our factory and of course our most significant advantage is our massive direct origination which is and will be operating in a higher margin environment.
So in summary we have a solid plan to outperform in 2009. A plan to diversify, remix, and grow in 2010, new business we believe at very attractive terms and returns, and most importantly an attractive and solid GE business.
And with that I’d like to turn it back to Keith.
Thank you Mike. I think that was a great update on GE Capital and I’m just going to wrap up with a few pages on the total company. Again, as Trevor said, we’ll be giving an update on the entire company on December 16 and the next page that I’m going to cover is about the portfolio.
This is the framework we’ve showed you, how we’re running the company, 60% of earnings and infrastructure type businesses, 10% of earnings in media, and approximately 30% financial services now below the 60/40 target.
Even in this environment we remain very strong. Our businesses have great competitive positions and infrastructure today, we really get a benefit from the big backlogs we have. We’ve built great positions globally. We have a strong services set of businesses that are growing fast with higher margins then the average of the rest of the portfolio.
We have great global positions. We have strong technical capability and in NBCU we have the benefit of the diverse revenue streams like our very strong cable and film franchises and also strong cost control.
And overall as we head towards the 16th, we’re preparing for a very difficult environment. We recognize the global economy but we remain confident in our businesses and we look forward to giving you an update on how the whole company is performing on the 16th.
And then finally one page here on the GE dividend, this is a detailed look at our cash generation and then the return of that cash to shareholders. I’ll just run you through the numbers on 2009. For example we’re planning on the industrial CFOA less our capital expenditures to be about flat to slightly up in 2009.
We’ve reduced the GE Capital dividend to 10% in 2009. You can see that reduction between 2008 to 2009 and we have about $2 billion of other cash flow mostly from employee plans and some smaller dispositions.
So that leaves us with about $16 billion of cash which we’ll use to pay the $13.4 billion of dividends with a $2 billion to $3 billion cushion for M&A and other cash needs.
So there’s a couple of points I’d make about the chart, we’ve given you the numbers here, the first one is if you look at the history over the last four years, we’ve had a very strong buyback program that went along with our dividends and the combination of the buyback and the dividend has averaged over 90% payout.
In 2009 we stay at that similar payout level but obviously it’s the dividend without the buyback so on a combined basis, buyback plus dividend, we’re staying in about the same range we’ve been for the last four years.
A second point is that based on the plan that Mike and the team have laid out here, we expect the GECAS dividend to grow again in 2010 so we’ll have additional cushion in 2010 and beyond as we benefit from the GE Capital earnings and the dividend up to the parent to support the external dividends.
We’re going to give you more of an update on December 16 but I thought the framework was helpful as you think about the GE Capital business performance that we went through today.
So back to the summary, you can see where we are in the fourth quarter. We’ll give you another update on the 16th of December. We’re taking smart prudent actions to lower our cost structure and recognize the more challenging loss environment. I think you see that’s a good framework that we’ve put together for 2008 and 2009.
GE Capital is in solid shape. The funding plan; safe and more secure. We’re being very realistic about the loss environment and we like our business model and think we remain very competitively advantaged as a FinCo with diversified funding.
So we’re positioned to perform in 2009 while also maintaining the dividend and Mike, I’d like to thank you and the team for their pitch and let’s open it up for Q&A.
(Operator Instructions) Your first question comes from the line of Robert Cornell – Barclays Capital
Robert Cornell – Barclays Capital
You certainly gave us a good overview and I think a lot of people feel more comfortable with what you’re doing but you’re talking about a sharply smaller company going forward from 2009 relative to 2007, and maybe you could just back up a bit and talk about some of the factors that drove the decision for the smaller focus company, was it just the credit crisis or is it sort of a broader part of the GE vision?
Well certainly the credit crisis precipitates us relooking at where we are from a funding capability and a business model and I think if you step back from the environment that we’re in today Mike and Jeff and Kathy and the team basically what we said was look, let’s look at these capital markets and let’s look at what we can do to fund ourselves safely and securely.
And when you start with that, with what you think you can do with long-term debt, what you think you can do with CP, what you think you can do with alternative funding, you say to yourself, how do we remain a competitively advantaged FinCo in a very challenged capital market and plan conservatively based on that funding capability.
I think that’s where we started. I think at the same time you look and say where are we competitively advantaged from a business model and clearly the core that Bill Cary described to you, we feel great about those business positions, origination, our domain knowledge, our underwriting, our risk management, and so we said we’ve got a core here that we really want to competitively continue to fund and grow.
And then we always have to step back and say, what are some of the assets that maybe we are less competitively advantaged in and those are clearly the things that we put in the runoff restructure business.
So has the financial crisis precipitated a harder relook at the whole business model? I’d say yes. But we started with safe and secure from a funding perspective and then competitively advantaged from a business model perspective and that’s how we worked forward.
I think everything you say I agree with Keith. I would say the other thing that we’ve done here is we’ve shifted the business given the liquidity market and the capital markets that we think going forward we’ve shifted the business more to an ROA focus from an ROE focus.
As you’ll see if you go through the three slices of how we’ve looked at this, the businesses that tend to attract more depth for the amount of net income they produce, more bank-like if you will, are less attractive in our model going forward so we’ve tried to take what we think we are the best at and the most attractive businesses, the businesses that we have I think demonstrated that we can grow and manage through cycles over the last two, three decades and brace those businesses and run them as core.
This collection of banks, joint ventures that we have in very wonderful parts of the world performing well, organize those as banks, and then businesses that just don’t make the cut for many reasons, although Bill said earlier, profitable businesses, but the fact is maybe don’t make the cut on an ROA basis or just in terms of an attractiveness basis on a going forward basis.
We spent a lot of time, we got a lot of advice, and we think this is an executable plan that positions the company in a safe way to grow on a going forward basis.
Robert Cornell – Barclays Capital
What would you say the average annual growth rate of the new focused company would be on a five-year basis? Is that a 5% grow, 10%, 15%, what sort of growth rate would you have in mind understanding its early in the whole repositioning process?
Well I think if you look at these businesses over time, we’ve been able to grow them solid double-digit over the decades and the market right now is difficult and its hard to predict how that’s going to go but the idea here is to, on the core business is to have them where they can grow double-digit as soon as the market allows that and to do that safely and to do that over time.
The good news is is that as we work that runoff and remix this business, you’re working off of high leverage global mortgages for example and to the core which is lower leverage and we can self-fund that growth in the core without having the overall business grow for a while and that’s one of the benefits of remixing this model for us.
Your next question comes from the line of Jeff Sprague - Citigroup
Jeff Sprague - Citigroup
I wanted to get a sense of how important or critical really the book leverage target is in 2009 vis-a-vie the comfort factor with the rating agencies on the Triple A and whether they’re really honed in on book leverage or the tangible metric is more important.
Well we have a whole package of metrics with both Moody’s and S&P. I don’t know whether there’s one metric that’s more important then the other. I would tell you that we’re committed to the book leverage metrics. That’s part of the plans that we presented to them and clearly that’s something that we’re going to meet those commitments on.
I think there’s several, certainly liquidity, managing our liquidity risk and getting our commercial paper down is important to us. Its important to them. Leverage both book and tangible leverage are important to them. Absolute size, and how much are we counting on long-term debt markets are important.
We have capital, liquidity, size, risk metrics that we work with but I can tell you we’re committed to the book leverage metrics. The 7:1 at the end of 2008 and the 6:1 at the end of 2009 are things that we’re going to meet.
Jeff Sprague - Citigroup
I guess the underlying reason for my question is there is a lot of uncertainty about the goodwill and there’s a recent example here in our coverage list of a much smaller company with a captive finance business and they’re only running off about 10% of their portfolio but they’re actually writing off all their goodwill as part of that process. So could you take us through a little bit, the logic on the goodwill and why running off UK mortgages and Australian mortgages and things like that doesn’t impair some of the goodwill associated with that.
A couple of things, first not everything is in runoff. If you look at the UK mortgages, we still have an ongoing business there, just to make it clear. We’re still originating and that has a value as a franchise and a going concern. Its smaller and its not going to be something we’re growing but that has a lot of value as a going concern.
Look we test the goodwill annually. We have impairment tests. We tested it in the third quarter. We’re updating it again in the fourth quarter. Goodwill is really aggregated at a very high level for GE Capital and its at the segments that report to Mike basically so at a real estate level, at a aviation level, energy financial services level, at a commercial finance core and a GE money core level.
So we think we still have value in all those franchises. They’re still earning money. They still have good returns and when we make an asset acquisition or disposition, disposition, we’d have to allocate some of the goodwill overall as a percent of the value of the segment to that set of assets that we sold but we don’t have anything today that’s tripping a goodwill trigger and we don’t anticipate we’ll have that in 2009 and as I said, we just updated those tests, our fair value of our total portfolio is about our book value and we do test that.
We tested it in the third quarter and we’re updating it again in the fourth quarter. I think its something we watch. I think to me, I think 7:1 and the 6:1 are the two that really the team is focused on right now and is probably the most important for us.
Jeff Sprague - Citigroup
And then just a follow on to how fast this grows going forward, if we just think about a normalized framework for retained earnings for GECAS on a going forward basis, does this ultimately get back to 40% payout to the parent or does it end up being some other metric down the road.
Our goal right now is that 2010 we bring that dividend payout back up to 40%. If you think about a 15% to 20% ROE business with a 60% retained earnings you can grow your assets basically double-digit, low double-digits and that’s what I think we can do.
Now I think the thing that adds to our ability to grow the core is this runoff of the, runoff restructure business at higher then average leverage. So our goal is to execute this plan and get back to a place where we can have GE Capital dividend payout at 40% at least in 2010 and that’s kind of the way we set up the structure.
And I think it will be a slower growth total enterprise because we’re going to be using those runoff assets to fund the growth in the quarter and we’re going to get the BankCo to be basically self-funded.
Your next question comes from the line of Nigel Coe – Deutsche Bank
Nigel Coe – Deutsche Bank
You covered a lot of ground in these slides, one thing you didn’t mention was pension at the GE level, obviously there could be quite a big swing on the funding for the plan which could have an impact on book value at the GE level. I’m just wondering what impact might that have on the Triple A and is that being factored in so far?
Well if you look at what we had as a pension surplus coming into 2008 we had a significant pension surplus. The pension fund returns have been impacted just like everybody else’s but right now we’re still in a surplus position and based on any of the forecasts and the models that we run we don’t anticipate that we would have any funding required from the GE parent into the pension fund through 2010, 2011 based on the forecast that we have.
We’re fortunate that we entered this period with a significant surplus. We’re pleased to say we still have a surplus but it has been a very challenging return period obviously for everyone and we’ll have to deal with what the pension implications are but I don’t see any pension funding implications in the next couple of years and the pension implications will be determined by the discount rates and then obviously the pension accounting which takes the difference between your actual return and your expected return and basically amortizes that into your earnings over the next 10 to 15 years.
So that’s a muted impact as well.
Nigel Coe – Deutsche Bank
You talk about this 15% plus ROE business, that implies $9, $10 million of earnings on a normalized basis. It doesn’t sound like you’re thinking about that for 2010, is that correct?
That’s correct. I think you’re in the low teens in 2009 and 2010 and its growing in 2010 as we grow the core again but its working its way back up over 15 in that period.
Your next question comes from the line of Steve Tusa – JPMorgan
Steve Tusa – JPMorgan
I just have a question, and there’s a lot of terminology in here and I’m obviously not a financial services analyst, so can you just tell us maybe is there a difference between what you’re talking about with regards to losses and the income statement provisioning or is that the same, is that an interchangeable term?
For the most part, that’s an interchangeable term. When we talk about losses, we’re talking about what’s running through the income statement.
Steve Tusa – JPMorgan
And then on the US consumer, it looks like it’s a relatively high loss rate for the US consumer, and the only thing you mentioned outside of that is UK mortgage, given that your book internationally is so much bigger is that really the only pressure point that you see globally for consumer finance?
We’re watching the portfolios everywhere in the world as you’d expect us to. The business models are not as susceptible to the changes in the underlying economy like the UK is and we really highlighted the US because we’ve got a lot of questions about the US, not that we’re particularly worried about it but it is the most acute place we’re seeing pressure today.
The balance of the portfolio is actually performing pretty well. We’ve seen pressure in a handful of markets around the world, again clustered in places like Ireland, and Spain in the mortgage business but the balance of the consumer businesses have really performed pretty well and we’re not worried about them from the loss standpoint and they’re much smaller actually in overall size.
Steve Tusa – JPMorgan
And so then when you’re talking about that $4.2 billion, again that would jive with what you provide in your filings as being the GE money US provision charge which was around $2 billion in 2007? I just want to make sure I’m looking at the right numbers here.
Steve Tusa – JPMorgan
Could you just give us a quick rundown given you’re updating the fourth quarter guidance on your segment profit targets for like energy infrastructure, technology infrastructure, NBCU or are you not giving those details today.
We’re not today, we’re going to give you our update on the fourth quarter for the whole company on the 16th.
Steve Tusa – JPMorgan
And then implied in that cash flow target for 2009 for industrial that would be inline with what you have previously disclosed which is the up 10% for industrial for 2009?
We’re not giving anything about industrial for 2009 today.
Steve Tusa – JPMorgan
So I can’t really read into that cash flow target that you put out there.
I am going to give you the industrial and the total company update for 2009 on the 16th.
Your next question comes from the line of Nicole Parent – Credit Suisse
Nicole Parent – Credit Suisse
I just want to follow-up first on your comments that you’re evaluating $5 billion in capital infusion in GE Capital, is it new money or money that you already have in hand or does it require some other outside activity?
There would be no new outside activity. This would be out of the money that we raised, would we put it in there to make sure we hit these leverage ratios. No new external activity.
Nicole Parent – Credit Suisse
With respect to the dividend slide that you have, is the spend of [CNI] still on the table and if so, what would the impact of that be on that slide?
You know, we’re going to talk about where we are with [CNI] on the 16th and I don’t think it would have a big impact on this slide.
Nicole Parent – Credit Suisse
Could you also give us a sense of what the securitization volume has been over the last 45 to 60 days or so.
I would say, we’ll start with the second half of the year, sales and securitization we’ve done about despite the environment, about $11 billion of sales and securitization in the last six months of this year including what we think will get done here in December.
I think in the last, in the fourth quarter we’ll end up being somewhere between $2 and $4 billion of securitization and syndication and so, as difficult as the environment is we’re still getting securitizations done and we’re still getting the alternative funding done associated with it.
Nicole Parent – Credit Suisse
We’ve had a couple of companies in our space over the past couple of weeks revalue their backlog given FX swings and I’m just wondering if we should expect that from you when we hear from you on the 16th.
I haven’t seen a number on it yet but I’ll make sure that we take a look at it before the 16th.
Your next question comes from the line of [Lee Rosenbaum – Unspecified Company]
[Lee Rosenbaum – Unspecified Company]
I just have a question on the $1 to $1.4 billion charge you discussed, if I just take the midpoint of that, you’ve indicated 70% of that would be for finance, can you talk a bit about what portion of that 70% is for increased provisioning?
I have for the whole charge, the majority of the charge will be for restructuring and other charges. In GE Capital itself its probably closer to 50-50.
[Lee Rosenbaum – Unspecified Company]
Okay so if I take $1.2 billion as the midpoint, $840 million for capital—
I’m not going to go that close but I’ll tell you what you can look at, if you—
[Lee Rosenbaum – Unspecified Company]
Half of it would be for credit and half of it would be for G&A and other operations.
I’m not splitting that yet. We’re still working through the fourth quarter that’s why I have a range here. But I tell you what you can look at, if you look at our third quarter estimate from the earnings call about what our losses were going to be in 2008, we’ve given you a new update here for the 2008 losses and the comparison should give you a reasonable split for yourself.
[Lee Rosenbaum – Unspecified Company]
Can you just talk a bit about what you think the possibilities are for your branch based deposit strategy going forward, is that an area that you think the finance businesses at GE can do more of on an organic or bolt-on strategy and if so, is there any additional color you can add to that given how much you’ve grown those deposits in the last nine to 12 months.
If you look at the slides, there’s a couple in here that kind of give you the details around what we’re thinking on alternative funding. The US institutions both the FSB or our US consumer thrift, and the industrial loan company here in the US have both grown their deposit bases pretty nicely over the past year and we see that trend continuing.
Obviously we’ve got a pretty good value proposition, we distribute through five major players. Our brand actually has got real value in that space and so its been an area where we’ve been successful and we feel good about our ability to continue to grow that.
In terms of the branch-based businesses, we’ve got about 900 branches in our banks around Central and Eastern Europe. In addition to that we’ve got branch-based businesses in our [inaudible] that aren’t included in that number, but are substantial. Our market share is, from a deposit standpoint range somewhere between 2% and 3% in each of the individual markets.
Our plans for 2009 reflect a slight uptick in our deposit market share in those markets but that really is why I made the comment that I think we’ve got upside in our ability to drive that going forward. The truth of the matter is, we really did not rely heavily on deposits. We were able to leverage the corporate treasury operations very effectively.
Its an area that we see great potential and the nice thing is, in addition to funding our businesses, it gives us even greater ability to cross-sell debt and other products to our customer base so it’s a win win all the way around and we feel pretty good about our ability to grow it.
And the last point I’d make is we’ve organized specifically around that. We’ve got a big GE Vice President leading that organization and we feel good about our ability to make that happen going forward.
Your final question is a follow-up from the line of Jeff Sprague - Citigroup
Jeff Sprague - Citigroup
Just to be clear on the charge, some of this will happen in Q4 and then it will take place over the balance of 2009 and does the $5 billion number for GE Capital in 2009 include or exclude the restructuring type charge items?
The charge that I’m talking about today is in the fourth quarter, $1 to $1.4 billion after-tax. It reflects the restructuring projects that we’re going to execute both on the industrial and the financial services side. And any carryover restructuring that we have to do on the financial services side to execute the cost-out plan that Mike and Bill laid out is included in the range that we’ve put together for GE Capital for 2009 here where we’re estimating we’ll earn about $5 billion.
There will be a charge in the fourth quarter that provides for a lot of what we need to do to get a lot of the costs out and any ongoing charges that based on when you can record them for the accounting rules that would happen in 2009 are included in our range here that we’ve given you where we were estimating we’ll earn about $5 billion.
Jeff Sprague - Citigroup
Just thinking about GE Capital tax going forward, so one of the reasons for the reversal in 2009 is just much lower volume of tax advantage transactions I guess but just going forward and the way that you’re reshaping the portfolio should we think about the tax rate being structurally higher then what we saw in recent years?
I think, its hard to say, structurally higher. We’ve talked about the GE Capital tax rate on a structural basis should be in the mid to high teens but obviously this year we’ve got a negative tax rate in the third quarter. We’re going to have a similar profile to the third quarter and the fourth quarter and we’re probably going to have a negative tax rate in 2009 based on lower pre-tax earnings and using the tax benefits in GE Capital against the GE industrial pre-tax earnings.
I think for 2009 what we’re saying, I’ll give you the consolidated tax rate when we give you the forecast for 2009 for the whole company. We haven’t broken out the pieces but I would say the fourth quarter is going to have a similar profile to the third quarter, a negative rate in GECAS and then 2009 will be a negative rate, and we still have to work through what the total consolidated rate will be for 2009.
Mike and the team I really appreciate you taking everybody through kind of the view of GE Capital. Just to wrap up here, I think we’ve made a tremendous amount of progress in the last two months over our funding plan. Certainly the debt markets have been the beneficiary of some of the government programs and also the passage of time.
I feel great about where we are with that. I think we’re being very realistic about the loss environment. I think we’ve put together a plan here with a base case now that we’re communicating that seems to be down exactly where most estimates are for 2009 based on the pressure we’re seeing in the economy.
And as Mike said, it could be a little worse but we think it would be incremental and people will have a different view of that and are welcomed to it.
And the third thing that I think is probably the most important is we like our business model. We can have a diversified finance company with diversified funding model and compete effectively and earn effective returns for shareholders based on that business model as a finance company connected to the industrial company and we like it.
We think its going to be more focused. Its going to be smaller and its going to be safer and we look forward to getting on with executing that and so we look forward to the 16th and we’ll see you there and give you the whole update on the company.
I’d like to thank Keith and the GE Capital team for their time today and the comprehensive presentation and everyone in the audience.
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