GE Capital – the financial arm of General Electric (NYSE:GE) – has undergone many changes since the financial crisis of 2008-09. During the crisis, many individual customers and businesses delayed and defaulted on their loan and lease payments, impacting earnings of GE Capital, which offers commercial loans and leases, home loans, credit cards, personal loans and other financial services.
At the time, GE Capital constituted nearly half of GE’s total earnings and thus, the financial crisis impacted the company severely. In its aftermath, GE steadily reduced the size of GE Capital by exiting from non-core assets like equity based real estate investments in order to reduce its dependence on the financial sector. As a result, today GE Capital constitutes around 40% of the company’s total earnings. Looking ahead, GE plans to continue to reduce GE Capital’s size to a point where its industrial business constitutes around 70% of its total earnings. 
Here we try to understand how GE is slashing the size of its financial arm while growing its core mid-market financing business and its profits from GE Capital. We currently have a stock price estimate of $24.50 for GE marginally above its current market price.
GE Capital Exiting Its Non-Core Businesses
GE Capital’s ending net investment (ENI) excluding cash, which provides a measure of its asset size, declined from $513 billion at the end of 2008 to slightly under $400 billion at the end of the previous quarter.   This significant decline in GE Capital’s size over the last few years was driven by its exit from non-core and under-performing assets. During this timeframe, the company divested a number of its non-strategic financial businesses that included marine container leasing, Garanti Bank, Regency Energy Partners, retail lending businesses in Singapore and Canada and consumer home lending businesses in Australia and New Zealand.
Despite these asset exits, profits from GE Capital rose steadily from $1.3 billion in 2009 to $7.4 billion in 2012 supported by recovery in the global economy, particularly financial markets.  In the current year, GE Capital’s profit growth is expected to continue despite a further reduction in its asset base. This clearly highlights that GE Capital of today is returning steady profits despite its smaller size. Going forward, GE plans to further reduce the size of GE Capital to around $300-$350 billion ENI by the end of 2014. 
GE Capital Is Growing Its Mid-Market Financing Business
At the same time, despite an overall reduction in size, GE Capital is growing its core business of lending to mid-size companies that include food franchises, manufacturers, distributors and retailers which generally do not get a lot of attention from big banks. GE Capital is expanding in this segment through its offerings that include equipment leases and secured loans for mid cap companies for growth, working capital, M&A and turnaround needs.
GE Capital holds the leadership position in franchise, flow retail and equipment finance verticals of the mid cap segment. Its clients include KeHE food distributor, NEI iron manufacturer, Federal Signal security equipment manufacturer, Waupaca iron foundry, Pacific Coast bedding manufacturer, and Dutra marine constructions, among others. Within mid cap financing, GE Capital is especially focused on verticals where it possesses deep domain knowledge like aviation and healthcare. Thus, the company is also a leading player in aircraft leasing/lending and healthcare equipment financing.
Additionally, GE Capital’s mid-market financing business comes largely from developed countries where laws are effectively imposed and money markets are mature, which makes it easier to raise funds locally. Thus, U.S., Europe, Australia, Canada, Japan and South Korea constitute major markets for GE Capital. In the long term, as money markets mature and imposition of laws improve in developing countries like China and India, GE will have large scope for growth in its mid-market financing business in these markets.
In the near term, as mid-cap companies in Europe remain challenged, GE’s financing business from them also faces a challenge. But the environment in developed markets of Asia and North America remains positive. In the U.S., according to figures cited by GE at a recent presentation, top line of mid-market companies are expected to rise by over 5% in the next one year.  This will likely increase investments from these companies, requiring financing which GE Capital can take advantage of. Overall, mid-market financing constitutes nearly 45% of GE Capital’s total asset size.
Retail Lending, Real Estate And Aviation Constitute Other Major Units Of GE Capital
GE Capital’s other major units include consumer finance where the company offers private label credit cards, bank cards, personal loans, auto loans/leases, mortgages, deposits and other savings products. This segment constitutes around a third of GE Capital’s total asset size. Earlier this year in January, GE Capital acquired the deposit business of MetLife Bank, which is an online banking platform with around $6.4 billion in retail deposits, to further strengthen its consumer retail lending business. In recent months, many reports in the media have indicated a possible exit of GE Capital from this business through an IPO or a sale, but there has been no confirmation on this from the company.
The remaining, roughly a quarter of GE Capital’s size, is composed by its real estate, aviation and energy financial services businesses. Additionally, capital and liquidity levels of GE Capital are strong with funding from multiple sources that include cash, bank credit lines, commercial paper and alternate funding.
Disclosure: No positions.