G.E., a Giant of Lending, Is Dragged Down Along With Banks

General Electric is best known as an industrial powerhouse, with manufacturing prowess in businesses that range from giant generators to jet engines to alternative energy technologies like wind mills and solar panels.

Yet General Electric is as much a bank as a blue-chip industrial company. Half of its profits come from its giant finance arm, GE Capital, whose global portfolio spans aircraft leasing, commercial real estate lending, credit cards and home mortgages.

Indeed, G.E. is the largest nonbank finance company in the United States, with assets of $696 billion and $545 billion in debt. If it were a bank, GE Capital would be the nation’s fifth-largest.

So G.E. found itself engulfed last week in the market turmoil, treated by fearful investors as another financial company potentially in peril, until news of a planned federal bailout brought a rebound in the markets late Thursday and Friday.

At one point on Thursday, G.E. shares were down 20 percent for the week, before they revived to close at $26.62 a share on Friday — down just 0.5 percent from Monday.

Perhaps more telling, the cost to insure the debt of GE Capital, with so-called credit default swaps, had more than doubled by Wednesday. The insurance cost had dropped by Friday, though it remained well above the level of a week earlier. G.E. was not among the nearly 800 financial companies that the Securities and Exchange Commission said it would temporarily protect from short selling, but the company expects to be added to the list, according to a G.E. spokesman, Gary Sheffer.

Given the continuing uncertainty and volatility in the financial markets, G.E. will remain in the spotlight and is likely to be under pressure. In a report on Thursday, the independent credit rating agency Egan-Jones concluded, “With the tsunami sweeping over the financial sector, it is unrealistic to expect that G.E. will not get wet.”

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G.E., according to analysts and institutional investors, will not face the huge write-downs of financial asset values that sets off a liquidity crisis — the downward spiral seen at the failed investment banks. G.E., they say, does not have large holdings of exotic securities and is conservatively managed.

G.E. also has far less debt than most banks, giving it more financial ballast and flexibility in difficult times. Its ratio of debt to equity is less than 8, compared with 15 for some large commercial banks and 30 or more for some investment banks before they ran into trouble.

But the financial market crisis, analysts say, does present G.E. with challenges to its financial performance, its strategy and perhaps even its business model of using stable profits from the finance unit to cushion the company from up-and-down cycles in industrial sales. The upheaval also makes it more difficult for G.E. to pare some of its holdings, like NBC Universal and the credit card operations, and make itself less reliant on the financial sector.

In general, analysts share the self-assessment offered this week by the president of GE Capital, Michael A. Neal. “We’re a very conservative finance company and not a Wall Street wannabe,” Mr. Neal, a long-time G.E. executive who took over as head of GE Capital in July, said in a brief interview last week.

The outlook for the current quarter is uncertain. G.E. had already startled Wall Street with lower-than-expected earnings in the first quarter, when the markets seized up with the collapse of Bear Stearns. Some analysts retooled their financial models last week and now estimate that GE Capital’s earnings in 2009 will decline 5 to 15 percent, compared with previous projections that the finance unit’s profit would hold steady.

The financial turmoil, they say, also poses a threat to the pace of the strategy of G.E.’s chief executive, Jeffrey R. Immelt, to simplify the sprawling company and reduce its reliance on the finance business. The plan is to trim the contribution from finance to about 40 percent, while tilting more toward supplying equipment for what it calls “infrastructure” industries like transportation and energy, as well as health care, which G.E. considers a high-growth field.

“Immelt wants financial services to evolve into a cash cow, and the infrastructure and technology businesses to be the growth engines of the company,” said Noel M. Tichy, a professor at the University of Michigan Business School who once ran G.E.’s management school at Crotonville, N.Y.

Sell-offs intended to accelerate the strategy will be more difficult in a time of credit-crimped economic weakness. G.E., for example, has said it wants to sell off its consumer appliance unit. But with housing in a slump and consumers tightening their belts, potential buyers are likely to be scarce and picky. G.E. has said it will not sell at fire-sale prices. The company has said its primary focus now will be to spin off both its consumer appliance unit and the lighting business.

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Similarly, the company wants to sell its private-label credit card business in North America, where G.E. handles credit cards for companies like Wal-Mart Stores, IKEA, Brooks Brothers, Dillard’s and Lowe’s. That business is still profitable for G.E., bringing in an estimated $500 million profit this year, according to Nicholas P. Heymann, an analyst for the brokerage firm Sterne, Agee & Leach. Yet that business too is becoming more difficult to sell at an attractive price as consumer spending falls and delinquencies rise.

Most analysts expect that G.E. will eventually sell its film and television business, NBC Universal. Time Warner has looked at buying NBC Universal, according to executives at the media company, who are not authorized to speak publicly. But if G.E. were to sell NBC Universal before it can reduce its dependence on GE Capital, the result would be that the finance business would loom larger in the overall company. So selling NBC Universal, analysts say, is probably a couple years down the road now.

G.E. did not avoid mortgage lending woes in the United States altogether, but it recognized the problem early and got out. In 2004, G.E. bought a subprime lender in California, WMC Mortgage. But G.E. grew alarmed by the risks and sold it off in 2007, taking a total loss of about $1 billion. “That was a big mistake,” said Robert Spremulli, an analyst at the investment company TIAA-CREF, which owns G.E. shares. “But it wasn’t a disaster for G.E.”

On Sept. 14, G.E. did post a letter to investors on its Web site describing its lending practices. In both its commercial and residential mortgage business, G.E. holds the loans it makes instead of passing them on to others. It was the originate-to-sell model of some mortgage brokers, who took none of the risk on the loans they marketed, that proved an invitation to irresponsibility and fraud.

Nearly 100 percent of G.E.’s residential mortgages are outside the United States. A G.E. spokesman said exposure it had to the embattled American International Group, a big mortgage insurer, was resolved by the insurer’s federal bailout.

G.E.’s commercial real estate lending is mainly outside the United States, and the average loan is a conservative 68 percent of the value of the property. G.E.’s finance business hinges on the company’s blue-chip triple-A rating from the big credit rating agencies, Standard & Poor’s and Moody’s. A top rating allows G.E. to borrow for less, and it lends mainly to midsize corporations, which typically have a lower, triple-B rating.

Sean J. Egan, manager of the credit rating desk at Egan-Jones, questions G.E.’s top-line rating. In his firm’s report last week, he wrote, “G.E. does not look, sound or act like a AAA credit and, therefore, probably is not a real AAA.”

In an interview, Mr. Egan said most of G.E.’s businesses — not just finance — would face increasing profit pressures in a weak economy. The company also needs to raise $80 billion over the next 15 months, mostly in commercial paper. “It all begs the question of whether G.E. can generate the levels of earnings and cash that it has in the past,” said Mr. Egan, whose agency rates G.E. at A+, several notches below AAA.

But G.E. insists its blue-chip credit rating is both justified and safe. In a perilous time for many financial companies, GE Capital reported a $5.2 billion profit in the first half of the year alone. In a conference call with analysts in July, Keith S. Sherin, G.E.’s chief financial officer, said that maintaining the company’s top credit rating was the priority. “Everything we do is about making sure we keep it AAA,” he said.