GE (NYSE:GE) is a premier infrastructure company, which is a leading supplier of industrial goods for the industries such as power and water, energy management, oil and gas, aviation, transportation and healthcare. Since the 2008-09 financial crisis, GE has been under the constant pressure to spin-off the non-core financial business of the company to a separate entity.
Recently, GE announced that it will initiate the spin-off of its North America Retail Finance ("RF") division through an initial public offering ("IPO"). Following are the details of RF unit, its portfolio, its past growth, future possibilities and effect of proposed IPO on the business.
North America Retail Finance:
GE's RF unit is among the oldest and most successful lenders in the U.S. with over 75 years of experience in the consumer financing. The business provides the financing services, which enable the consumers to make the purchases through the range of flexible financial products including credit cards (private level and co-brand cards) and installment loans. The unit has teamed-up with over 150,000 retailers, contractors, dealers and healthcare providers of all sizes in many key industries including: Agriculture, Automotive, Electronics & Appliances, Flooring, Furnishings, Healthcare, Home Improvement, Luxury, Music, Power Equipment, Power-sports, Sporting Goods, Technology, etc.
U.S. Consumer credit:
The consumer credit market is one of the largest credit markets in the U.S. and broadly consists of two major types: revolving and non-revolving. For the period ended Q3, 2013, the total outstanding consumer credit was $3050* billion.
*Covers most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate
- Revolving credit:
This type of credit allows a consumer to utilize the prearranged credit limit, which may or may not be secured by a collateral. Credit card loans are most prominent form of the revolving credit. Once repaid the consumer can again use its credit limit whenever required. For the period ended Q3, 2013, about 28% of the total outstanding consumer credit in the U.S. was the revolving credit (see the chart below).
- Non-revolving credit:
This type of credit is not revolving that means a consumer can't use the credit limit again and again. Consumer motor vehicle loans, education loans, boat loans, recreational vehicle loans, and personal loans, are the examples of the non-revolving credit. For the period ended Q3, 2013, about 72% of the total outstanding consumer credit was the non-revolving credit.
The Unit's assets include GE's US and Canadian private-label and co-brand card business ($36 billion of receivables as on September 2013), Payment Solutions business ($11 billion) and Care Credit finance business ($6 billion).
- Private-level and Co-brand card businesses:
Private-level and Co-brand Card businesses makes about 68% of the unit's financial portfolio. Most of its private label credit cards are issued by the retailers such as J.C. Penney Co, Pep Boys, La-Z-Boy Inc, Wal-Mart Stores Inc, etc. Most of the private-label credit card financing is the unsecured financing. Private-level and Co-brand card businesses primarily consists of the non-revolving credit.
Industry growth and size: (Co-branded/affinity credit cards)
According to Packaged Facts, the U.S. co-branded/affinity credit cards market went through the consolidation phase during 2009 to 2013, period. During this period hundreds of smaller and less profitable co-branded programs left the market for 120 major co-brand credit card partnerships. During same period the percentage of the consumers who used these cards fell from 55% to 43%.
According to another survey by Packaged Facts, after the years of consolidation the U.S. retail co-branded credit market is set to grow again. The total private label credit card loans are expected to grow at CAGR of six percent through 2015 from the base of $108.6 billion in 2012.
- Payment Solutions business:
Payment Solutions business makes about 21% of the unit's financial portfolio and consists of all the consumer lending, except the credit card business.
- Care Credit finance business:
Care Credit finance business makes about 11% of the unit's financial portfolio. CareCredit offers the healthcare financing for consumers through a network of nearly 175,000 enrolled providers. CareCredit is a healthcare credit card, which is used as a payment option for health, beauty, and wellness. CareCredit is offered primarily for: Dentistry, Vision care, including vision correction, Veterinary medicine, Hearing care, Cosmetic treatments and surgery.
Credit Quality: (Source: Latest form 10-Q)
The assets of Retail Finance unit are primarily consist of the private-label credit. Most of the private-label credit card financing is the unsecured financing and can only be used for the products and services sold by the retailers.
Internal ratings translated to approximate credit bureau equivalent score* (Source: Latest form 10-Q)
681 or higher
614 or less
U.S. installment and revolving credit
*The company's internal credit scores imply a probability of default, which it consistently translate into three approximate credit bureau equivalent credit score categories, including ("A") 681 or higher, which are considered the strongest credits; ("B") 615 to 680, considered moderate credit risk; and ("C") 614 or less, which are considered weaker credits.
So, about 14% of Retail Finance receivables were of low quality (weak credits) at the end of the last reported quarter.
GE expects that 2013 Retail Finance earnings will be in line with its 2012 profits of $2.2 billion.
Most of the credit portfolio of the unit falls under "the U.S. installment and revolving credit".
Despite the fact that GE intends to bring down its financial portfolio since the last few years, the assets under "the U.S. installment and revolving credit" showed an increase of over 10% from $46,939 million to $51,799 million in the last 12 months (see the chart below). So it's a growing business. (Data Source: Third quarter 2013 supplement)
The prime risk of IPO and spin-off is the total separation of RF unit from GE as the unit will no longer be the part of GE beyond 2015. This means that the unit will not be entitled for any funding or bailout in any sort of crisis from GE after the separation. Another risk that the proposed entity faces is the lack of geographical diversification as all the assets of the entity belong to North American region.
Conclusion and Future:
IPO will be one of the biggest IPOs in the recent time. The IPO will serve the multiple benefits to RF unit like:
- The size and reach of the business:
The new entity will be one of the largest providers of the installment and revolving credit in the U.S., which works with nearly 150,000 entities and has a large base of consumers in the diverse set of industries.
- More focused management:
After the separation the unit will be a fully focused entity and it will focus on the growth of the business rather than to control the size of the business. So, as a separate entity the business is expected to grow more. For competitors like American Express (NYSE:AXP), Capital One (NYSE:COF), Discover Financial (NYSE:DFS), etc. the unit will emerge as a much bigger challenge. The new entity will keep the amount raised by IPO, which will further fuel the growth of the business.
All in all, IPO will a positive for the entity as it will put the business firmly on the growth path.
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