GE Japan "Rolling in the Yen," But for How Much Longer? (GE)

Below are extracts from General Electric's (GE) Q2 conference call regarding its consumer credit business in Japan. Although very profitable, the sustainability of 40% ROE is in question since the government is looking to introduce lower lending rate caps and clean up the lending business. Unfortunately for GE Japan's consumer finance division and other lenders such as Takefuji (TAKAF), some shady bad apples have consistently received a lot of negative press in Japan for apparent usury and strong arm collection tactics.

"The one place we are watching here is Japan. Earnings are down 14% from both competitive and regulatory pressure. I know you have seen some stories about rate caps in the Japan, and we are working on that with the government and with our business trying to be prepared, but that probably will not impact us until the second half of ’07 or ’08, so we have time to deal with that. We still made $100 million in Japan with a 40% ROE, so a pretty good performance there."

In the Q&A session David Bleustein of UBS asked, "What would the impact be if Japan cut its rate cap down to, call it 20%?"

Keith Sherin, GE's Senior Vice President and Chief Financial Officer responded saying:

"I do not have a specific number on that. As I said, the business made about $100 million in the quarter. It has a good ROE. What we would have to look at is the impact today from somewhere in the high 20’s down to whatever they put it, and in between here and there we are going have to continue to focus on productivity. We are going to have to take costs out. We are going have to do more risk-based pricing. We are looking at other business development activity. There are a lot of options we have as you look forward over time.

As I said, that probably will not impact. I mean, there is a lot of negotiation going on with the government and the financial industry players over there. That probably will not happen until the second half of 2007 or early 2008. The good news is we have a lot of time to look at it, work on it and be able to proactively deal with it."

General Electric Co (GE) 1-year chart: