- The Washington Times - Thursday, March 19, 2009

WASHINGTON (AP) - General Electric Co. assured investors Thursday that its financial unit is stable and will at least break even this year, even under a worst-case scenario of double-digit unemployment and a sharper slump in the economy.

One the world’s biggest companies, Fairfield, Conn.-based GE makes everything from light bulbs to jet engines, but last year it generated nearly half its $18 billion in earnings from GE Capital, its finance arm. Fears that the business, which finances credit cards, airplanes, factories and overseas mortgages, could see growing losses on loans gone bad, have helped pushed down GE stock 71 percent in the past year.

GE had set a target of $5 billion in profits for GE Capital this year, down from $8.6 billion it earned in 2008. But the company cautioned Thursday at an investors meeting in New York that earnings could be flat if the economy is bleaker than expected. That scenario, part of a model the government is using to test the health of banks and other financial institutions, includes peak unemployment of 10 percent and a decline in gross domestic product of around 3 percent.

Company officials said they were surprised by the ballooning unemployment rate, which now stands at 8.1 percent. Some economists project it could top 10 percent by the end of the year.

The stress test model also includes a less dire projection of a 2 percent drop in GDP and average unemployment of 8.4 percent. Under that scenario, GE Capital would earn between $2 billion and $2.5 billion.

Many economist believe the economy will contract by at least 2 percent this year.

Still, GE expects the company to profitable in the first quarter.

The investors meeting, GE’s second in four months, comes as it tries to soothe concerns about the risks at GE Capital. More than 15 top executives briefed analysts and investors for 6.5 hours, presenting data on everything from commercial real estate in Los Angeles to banking in Poland.

The overall message: GE is in good shape despite facing big problems.

“We are running GE to be safe and secure,” Keith Sherin, GE’s chief financial officer, told investors.

Sherin said GE Capital could see $40 billion of losses between 2008 and 2010. But he said the unit will not need to raise new money and could rely on GE funds if it needs more cash. GE has raised $45 billion of long-term funding for 2009, about 93 percent of its goal for the year. Much of that was through a program that offers federal government backing of corporate debt.

“We have sufficient capital and alternatives to weather the tough environment,” said Mike Neal, head of GE Capital.

GE’s presentation focused on major areas of investor concern _ credit cards, mortgages in the United Kingdom and its holdings of commercial real estate. CEO Jeff Immelt told investors in February that he wished the company had not been as heavily invested in UK mortgages and commercial real estate. GE also tried to sell its credit card business last year but no buyer came forward.

Many investors speculated that big losses lurked in GE Capital’s real estate holdings, which include $48 billion of loans and $33 billion worth of property. GE says it plans to hold most of its assets for long periods and doesn’t borrow heavily against them, as other real estate investors do. That means it doesn’t have to take big write-downs on the falling values of properties like office buildings.

GE expects UK housing prices to fall by double-digits in 2009. But it has drastically cut back on new loans _ down to $100 million this year from $10.7 billion in 2007. However, GE still saw the delinquency rate rise to 21 percent in 2008, and expects its write-offs from UK mortgages will grow 3 percent to 5 percent between 2009 and 2010.

GE’s credit card business, which is mostly retail brand cards for stores like Gap and Lowe’s, also faces higher losses this year as delinquencies grow. GE said it has already taken steps to ease the blow, lowering credit lines and raising requirements for new accounts.

Still, losses are expected to grow. For example, real estate loan losses could reach $1 billion, more than GE’s $400 million projection in December. GE’s lending business for big equipment could reach $2.5 billion in losses, up from a previous forecast of $1.5 billion.

Eric Boyce, a portfolio manager at Hester Capital Management in Austin, Texas, said GE demonstrated it was trying to mitigate risk but could still be hurt by the broader economy. He said it is more likely GE will post flat profits rather than hit its $5 billion forecast.

“They have a good program of risk management, but they are not immune to the global recession,” said Boyce, whose firm holds 600,000 GE shares, about 1 percent of its overall portfolio.

Since GE missed its first-quarter earnings forecast last April, the share price has fallen from the high $30s to a low of $5.72 earlier this month. GE has cut its dividend for the first time since 1938, and last week it lost its coveted ‘AAA’ credit rating from Standard & Poor’s.

GE plans to restructure and shrink GE Capitals, cutting it down to about 30 percent of overall company earnings. It is reducing its use of riskier debt like commercial paper and slashing an unspecified number of jobs as well.

Shares of GE fell 19 cents, or 1.8 percent, to close at $10.13. Shares had risen as much as 7 percent earlier Thursday.


AP Business Writer Daniel Lovering in Pittsburgh contributed to this report



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