A Perspective on the Pending IPO of GE Capital Retail Finance
On November 15, GE formally announced that it plans to spin off its credit card business, GE Capital Retail Finance, via a staged IPO process beginning in 2014. With $53 billion in receivables and a roster of large, long-standing relationships, there is a lot of speculation in the marketplace about the implications of this spinoff for clients, competitors, and investors alike. The announcement by GE restated its rationale for the spin off, but due to SEC protocols, more detail will have to wait for the IPO filing.
In many ways, the decision to spin off the card business lifts some of the uncertainty that has been hanging over GE since its 2007 / 2008 attempt to sell the business at a very inopportune time. Since the credit crisis, GE’s corporate executives have communicated a series of assurances to the investment community that GE Capital’s asset base would be managed to a lower, less risky level that more closely aligns with the industrial side of the corporation. With its commitment to the card business in question from time to time, a successful spin-off could prove to be a liberating event for “NewCo,” but notwithstanding the credit crisis, its legacy ties to GE dating back to the 1930’s have been a source of great stability over the long term.
While the size and scope of the spin-off alone create uncertainty, our view is that most of the attention of clients, prospects, and investors will be directed at NewCo’s funding capacity and costs – the lifeblood of growth and competitiveness. Candidly, a sale of the business would have likely raised a different set of concerns in areas such as the stability of the management team, the integration of the operational platform, and the direction of the underlying business strategy. In the case of a spin off, those very areas are likely to be relatively stable and most of the attention will be on asset funding. On that note, GE Capital Retail Finance has taken steps to diversify and solidify its funding profile. To complement its $20 billion securitization, earlier this year GE Capital Retail Bank acquired an on-line deposit platform and $6.4 billion in deposits from MetLife. However, the backing of the parent company has long provided a sense of stability to its retail partners and likely also to regulators. Up until 2009, GE enjoyed a rare AAA rating and prior to the crisis it tapped the commercial paper market with ease. That said, GE shared with the investment community that its retail finance business is largely self-funded, but large competitors will be quick to point to their deposit-gathering engines as more proven, stable, and low-cost. GE has spun off other businesses in similar fashion; in 2004, its insurance unit, now Genworth Financial, went through an IPO in stages, and more recently, GE completed the first stage of the IPO of GE Money Bank AG in Switzerland (trading as Cembra Money Bank AG), committing to over $1 billion in funding to ease the transition.
All things considered, we expect this move by GE to result in increased competition in the retail card sector in both the short and long-term. In the short-term, GE will obviously attempt to retain its most attractive partners – especially those that are approaching the natural expiration of their contracts. Of course, competitors will seek to unseat them, but in this instance the only difference in the competitive dynamic is the IPO. Long term, NewCo could emerge as a more aggressive competitor to the extent that the parent company had the card business on a tight leash in recent years, as it carefully managed how GE Capital was positioned on Wall Street.
Despite the spotlight on funding, GE Capital Retail Finance is large and profitable – it has scale, domain expertise across many verticals, and a unique portfolio of private label, co-brand, and sales finance assets spread across a roster of attractive clients. History shows that other banks with strong funding have been unable (or unwilling) to compete in the retail segment in a meaningful way over the long term. In other words, it takes more than a giant balance sheet to win given the specialized nature of retail credit. One needs to look no further than the growth of Alliance Data in recent years to test that hypothesis. A more aggressive NewCo opens up many possibilities ranging from its pursuit of new verticals (e.g., T&E), to value-added service offerings (e.g., loyalty/analytics), to new alliances (e.g., mobile). While any IPO in consumer finance will be less sexy than those in Silicon Valley, there is no denying the profitability and resiliency of the credit card industry and GE Capital Retail Finance is no exception.
Figure 1: GE Capital Retail Finance Portfolio Composition
($53 Billion; Q3 2013 EOP Receivables)
For more information, please contact John Grund, Partner specializing in Credit Card Issuing,email@example.com.
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