General Electric’s announcement last week that it will drastically shrink GE Capital by divesting nearly $200 billion in assets will have some direct and indirect impacts on other financial firms across BMO’s North American Financial Universe.
Lana Chan and team at BMO Capital Markets in their April 10 research report titled: “GE Capital to Divest $200 Billion in Assets – Impact on North American Financials” states that certain U.S. regional banks could have an interest in segments of GE’s U.S. commercial loan portfolios.
GE Capital selling $200 billion in assets
As highlighted by ValueWalk, General Electric announced that it is selling most of its GE Capital assets to create a more valuable and simple company. It was also reported that Blackstone and Wells Fargo are acquiring a GE real estate portfolio valued at around $27 billion.
The following graph captures GE’s planned asset dispositions:
GE’s substantially downsizing of its GE Capital unit over the next two years includes a $9 billion fleet leasing business, a $16 billion financial sponsors’ portfolio, $74 billion in U.S. commercial loans, $31 billion in international commercial loans, and $37 billion of international consumer loans. BMO Capital Markets analysts, in their report, offer analysis on how these actions may affect the companies they cover.
Impact of GE’s downsizing
The analysts note that GE’s latest action will benefit Element Financial, as it directly competes with GE in three of the businesses GE is exiting. They point out that the exit of GE Capital from fleet leasing and railcar leasing will create disruption in the market and should translate into immediate top-line and pricing benefits for EFN. They believe EFN may also find interest in GE’s fleet and vendor businesses.
As regards to CIT, the analysts point out that it has considerable overlap with many of GE’s businesses. However, they add that it is currently focused on completing the OneWest transaction. The analysts note that while bolt-on asset acquisitions could enhance CIT’s earnings profile, they would prefer that CIT pursue acquisitions of deposits over assets, as the analysts appreciate the multiple re-rating potential that could result from transforming CIT from a specialty lender to a regional bank.
However, the BMO analysts believe for Wells Fargo, the impact of the CRE transaction will be modest as the combined loan purchases and loans extended to Blackstone will be just 1.5% of the total of Wells Fargo loans.
Turning their focus on U.S. regional banks, Chan and team note that, depending on the size of the portfolio sales, some of their regional banks, namely, PNC Financial, BB&T, Keycorp, Regions Financial, and Sun Trust Banks could have an interest in certain segments of GE Capital’s businesses and commercial loan portfolios. The analysts believe if the loans are parceled out, there could be some interest from small- to mid-cap banks like Bank United, City National, East West Bancorp, Signature Banks, and TCF Financial.
The analysts believe Toronto Dominion is another potentially interested party, as the bank’s U.S. franchise remains focused on building out the asset side of the balance sheet, though it may not have the excess capital to support a large portfolio purchase. The analysts note that the bank has expressed a willingness to acquire complementary portfolios of assets to its existing franchise.