Once regarded as a "bank with an industrial arm," General Electric's (NYSE:GE) management team has made a concerted effort to invert that image in recent years. GE wants to relegate its finance unit, GE Capital, to the back burner and rediscover its industrial roots. But a half-decade after the financial crisis, the assets of GE Capital rank alongside those of the biggest banks in America.
At this point, should investors in GE commend or condemn management's banking strategy and execution? Let's take a closer look at where GE Capital stands today.
An identity crisis
GE Capital generates more than $45 billion per year in revenue, which was about on par with Fortune 100 giants like Coca-Cola and Lockheed Martin last year. But this isn't a stand-alone company. It's housed inside a large conglomerate, a position that can muddy the waters when trying to assess its operations.
For example, financial regulators like the Federal Deposit Insurance Corporation do not recognize GE Capital as a true bank or financial institution. So when investors read about the "largest banks in America," GE's banking arm is usually nowhere to be found.
On the flip side, the FDIC decided in 2008 insure up to $139 million of GE Capital's debt. Admitting GE Capital into the FDIC's circle of trust made a lot of sense back then, especially when you consider that two of its operations -- a federal savings bank and an industrial loan company -- already qualified for the backstop program. Secondly, GE Capital would have been the nation's sixth-largest bank by assets at the time, if you lumped this "nonfinancial institution" in with the "too big to fail" gang.
For these reasons, it's hard to blame investors who concluded that "if it looks like a bank and quacks like a bank, then it must be a bank." GE Capital had stolen the show at GE, and after the financial meltdown, the company was experiencing an identity crisis. That was the storyline that stuck, particularly among investors and the financial media. And it's a story that will likely persist, at least until GE completely detaches its fate from that of GE Capital.
As a result, the most important thing for investors to assess is management's progress to that end. For those who stuck around, is there smoother sailing ahead?
Same as it ever was?
As the saying goes, there's more than one way to skin a cat. When assessing GE Capital's track record to date, there's a quick-and-dirty method and a more deliberate approach. It's easy to draw conclusions from the former. Glance at a chart of America's largest financial institutions, and it looks like it's banking business as usual for GE:
GE finishes in seventh place in terms of total assets, right behind Morgan Stanley and in front of Bank of New York Mellon. Wow, just look how far we've come!
Sarcasm aside, GE still resembles a massive bank, at least from this perspective. With appropriate context, however, a different story unfolds. As Fortune pointed out recently, America's six largest banks -- excluding GE -- have watched their assets inflate by 37% from five years ago. Meanwhile, GE Capital's assets shrunk by about 15%. And investors questioning whether GE's committed to reinventing itself should consider the recent developments at GE Capital:
A diminishing role: The percent of GE's total revenue from GE Capital has decreased from 39% in 2007 to 31% at the end of 2012. Unimpressed by a measly 8-percentage point decline? Well, for context, that means the company's shrunk its financial business by 31%, shedding $20 billion in revenue along the way. And GE managed to turn a profit every year.
A smaller footprint: GE Capital's ending net investment, or ENI -- perhaps a better measure of the institution's largesse than total assets -- has decreased from more than $630 billion in 2007 to $385 billion in the most recent quarter. That represents a 39% decline. At this rate, GE is well on its way to meeting CEO Jeff Immelt's target of $300 billion-$350 billion by the end of 2014.
A stronger balance sheet: GE's tier 1 common ratio, which stood at 5.7% at the end of 2008, hovers around 11% today. This ratio is a core measure of a bank's financial strength, and at 11.1 GE would finish in ninth place among the nation's strongest banks as of May 2013.
A longer regulatory leash: Regulators forced GE Capital to cease paying dividends to its industrial parent company from the financial crisis through 2011. However, reassured by GE Capital's strengthened balance sheet, the Federal Reserve allowed the dividend to be reinstated last year. GE Capital proceeded to pay out $6.4 billion in dividends to its parent in 2012.
A return to making things: In August, The Wall Street Journal reported GE Capital is preparing to spin off its consumer finance business, which could be conducted through an IPO early next year. This segment makes up about 34% of GE Capital's revenue, but the consumer-oriented business served as a distraction as GE returns to its industrial roots.
A focus on providing the best product: Just this week, Money magazine awarded the "Best savings account" prize to GE Capital's online bank. The financial services firm Novantas assessed the value of GE Capital's offerings against retail banks, online banks, and credit unions alike. What's particularly impressive about GE's recognition? GE Capital Bank just launched for customers in June of this year.
As mentioned before, the devil is in the details when it comes to evaluating GE Capital's turnaround.
A big bank, but a better one
Five years since Wall Street's collapse, GE Capital's heft still measures up with some of the biggest banks in America. From 10,000 feet above sea level, you might have difficulty separating this ship from the rest of the banking vessels.
Upon closer inspection, however, you realize GE's management crew has been busy right-sizing the boat, one that nearly capsized the entire company in 2008. Thus far, it's made significant progress, which is perhaps more than you can say about the Wall Street titans of industry (see here and here). But that's a different story. GE Capital might resemble a bank, but GE's not "locked into" the banking business. In fact, it's looking for the exits. It will take some time, but for now this company's headed in the right direction.