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GE finance arm tightens lending standards worldwide in crunch

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Bloomberg Boston

General Electric Co is tightening lending standards worldwide to help reduce risks amid the global credit crunch, Chief Financial Officer Keith Sherin said.

“Our requirements for return hurdles have gone up in every business globally,” Sherin said yesterday in an interview. The collection of finance units known as GE Capital contributed more than half of Fairfield, Connecticut-based GE’s profit in 2007.

The stricter standards and steps that Chief Executive Officer Jeffrey Immelt calls his “lines of defence” are designed to help GE stay profitable and protect its AAA credit rating amid the worst US financial conditions since the Great Depression. GE yesterday posted a 12 per cent decline in third-quarter profit that met analysts’ average estimate, triggering its biggest one-day stock surge in at least 28 years.

 

Immelt, 52, moved to shore up GE’s cash October 1, deciding to raise $12 billion from selling common stock and $3 billion by selling preferred shares to Warren Buffett’s Berkshire Hathaway Inc. Six days earlier, he had told investors no such move was needed amid other measures to shore up capital, even as he lowered his 2008 profit target a second time.

“We thought it was smart to have suspenders on suspenders on suspenders in this cycle,” Immelt said on a conference call with investors. “I think investors have to feel really great about those lines of defence.”

GE’s third-quarter profit from continuing operations fell to $4.48 billion, or 45 cents a share, from $5.11 billion, or 50 cents, a year earlier. Sales rose 11 per cent to $47.2 billion. GE rose $2.49, or 13 per cent, to $21.50 in New York Stock Exchange (NYSE) composite trading, its biggest gain in Bloomberg data dating to 1980.

Immelt and Sherin say GE’s goal is to shrink its finance arm to about 40 per cent of total profit, down from half last year, while emphasising its infrastructure divisions focused on energy, aircraft engines and healthcare.

The company has been able to keep lending at “high margins”, Sherin said on the conference call. GE still predicts about $9 billion in profit from its financial units this year, even as fourth-quarter income from that part of the business drops as much as 30 per cent.

GE is curtailing the kinds of loans it writes, “capping off” real estate and consumer areas as it shores up liquidity to cushion against seizing capital markets, Sherin said. GE plans to shrink its real estate unit below $80 billion in assets next year from $89 billion in this year’s third quarter.

“At GE Real Estate, we just aren’t underwriting any new equity and have very, very limited debt originations,” Sherin, 49, who has been CFO since 1999 and also is a vice-chairman, said in the interview. “The absolute size, we’re going to bring down over next 15 months.”

Mortgage lending
At the GE Money consumer unit, the company has also raised requirements, particularly on mortgages, where “new underwriting is almost insignificant”, Sherin said in the interview.

Swings in the London interbank offered rate, which lenders typically used as a base for writing new loans, “have been disruptive” and made it difficult to decide what price to charge new customers who want loans based on Libor, Sherin said.

“In the height of volatility, we just stopped for a little while underwriting,” Sherin said. “Just because it was a pricing issue, as opposed to a funding or capital issue.”

Libor, set by 16 banks in a survey conducted by the British Bankers’ Association (BBA) each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. The cost of borrowing in dollars for three months climbed 7 basis points to 4.82 per cent yesterday, the BBA said.

“There’s a bigger issue on Libor which is how banks lend to each other,” Sherin said. “That’s the bigger issue and that’s not really affecting us other than just how it affects the whole market.”

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First Published: Oct 12 2008 | 12:00 AM IST

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