GE Capital’s 2Q16 revenues
GECC (General Electric Capital Corporation) reported $2.3 billion in revenues in 2Q16 compared to $2.4 billion in 2Q15. This was a drop of 3.1%. In terms of the capital exits worth $181 billion, GE is ahead of plan as it has closed $158 billion, as of the end of 2Q16. GE Capital is the first institution to complete the SIFI (systematically important financial institution) designation process with effect from June 6, 2016. GE Capital is continuing to perform ahead of plan.
Why is GE downsizing its financial services business?
In April 2015, Jeffrey Immelt, General Electric’s (GE) chairman and chief executive officer, announced plans to downsize the financial services (XLF) business to focus on traditional industrial businesses including power, oil and gas, aviation, transportation, healthcare, and energy management.
GE’s financial services business had over $400 billion in assets excluding cash and cash equivalents at the time of the announcement, making it equivalent to the seventh-largest US bank by assets. Due to its sheer size and reliance on wholesale funding, GECC has been on the radar of regulators and shareholders in recent years. GECC is categorized as a SIFI by the Fed (Federal Reserve). SIFIs are closely regulated by the Fed and are subject to stricter regulations due to their importance and the ability, due to their size, to disrupt the economy in case of any trouble. GE wanted to come out from under the radar by delisting from SIFI.
Due to regulatory issues, reduced attractiveness, and mounting pressure from shareholders, GE decided to substantially reduce its exposure to financial services and generate 90% of its overall profits from the industrial business by 2018. GE’s financial (XLF) services business includes GECC’s wholesale and retail operations.
General Electric and its peers
GE’s large-cap peers are 3M (MMM), Honeywell International (HON), and Illinois Tool Works (ITW). HON also announced its results on July 22. HON’s 2Q16 revenues came in at $9.9 billion, up 2.0% when compared to $9.7 billion in 2Q15. The increase in revenues was due to acquisitions.
ITW announced its results on July 20. Its 2Q16 revenues came in at $3.4 billion, marginally down by 0.1% when compared to 2Q15. ITW’s growth in organic sales was 2%. MMM announced its 2Q16 results on July 26.
On a year-over-year basis as of July 22, GE rose 20.4% against a 2.8% drop for the broad-based S&P 500 Index (SPY). On a year-to-date basis, GE rose 4.9%.
In the next part of this series, we’ll explore how General Electric will benefit from shedding the “SIFI” tag.