GE Money, one of the biggest funders of Australia’s non-bank housing loans and car loans, is on the verge of quitting both businesses in Australia completely as its US parent seeks to lower is risk profile by selling of unwanted and marginal business around the world, according to a tip received by Crikey.
It is rumoured that GE Capital Australia will announce next week that it is ceasing all activity in mortgages, including the impending Wizard sale to the National Australia Bank.
Asked if there was any truth to the rumour, GE told Crikey this morning that it was scaling back certain aspects of its Australian operations:
Due to the rising cost of finance bought on by the turmoil in world finance markets, we’ve been implementing ways to reduce our exposure for a while across the business – including motor. As a result we have been terminating agreements with some retail and wholesale motor partners over the last few weeks.
A few other examples across the business have been reassessing our loan to value mortgages, cutting our fixed rate mortgage options and flexible options prime mortgages since August and also tightening up on cash limits for financially stressed card customers and reducing eligibility for credit limit increases.
GE’s car financing business is huge as it runs a so-called “white label” business for many car importers, including extensive floor plan volumes which underpin dealer inventory across Australia.
It’s size can be seen from this page from its website details the extensive list of NSW dealers. There are over 80 new/used and used car groups financed by GE in NSW alone, with Holden, Ford, Mazda, Audi and Toyota among the brands financed.
Much of this floor plan financing won’t be able to be refinanced as GMAC, Ford Credit and Esanda (part of the ANZ) are pulling back from new business while reducing current relationships markedly since July as car sales have fallen (down 8.5% last month by some estimates). GMAC and Ford credit have their own problems in the US with plummetting sales, rising losses, especially on souring leases, and a shortage of credit for their own businesses.
Esanda’s decision is linked to the de-risking/leveraging of its business by new CEO, Mike Smith, in the wake of the adventures with dud margin loans and US deals that cost it $A1.9 billion in write-offs and cut 2008 earnings to $A3.02 billion, a drop of 23%.
If it happens, the company’s departure from the car financing business will leave a huge hole in the motor industry and could damage retail sales and employment, if the dealer’s can’t refinance.
GE’s action is part of a global strategy to protect its ratings by reducing leverage and retail exposure. The elimination of these activities will result in the redundancy of approximately 80% of related staff. (About 15 to 20% may be relocated to other departments.)
GE’s car plan financing is similar to the way that it and financial groups financed so-called white label home mortgages for a string of groups, most of whom have gone out of business or contracted.
GE’s US parent has already sold financial businesses in Germany, Japan is trying to unload high risk consumer and other financial services in the US. It also trying to sell some of its oldest industrial business in white goods and lighting products.
US investor, Warren Buffett recently invested $US3 billion in GE in a move designed to lift confidence in the huge industrial and finance group. Buffett’s investment helped the company raise a total of $US12 billion in new capital late last month.
It had looked at selling its private label credit card (that’s another white label business) in the US but has decided to shrink the business by allowing other companies bid for expiring contracts with card issuers.
GE CEO, Jeff Immelt has said his plan is to cut the finance units known collectively as GE Capital to 40% of total group earnings 2010, from more than 50% last year.
GE Capital first got into trouble with subprime mortgages which have cost it billions of dollars in losses, write-offs and other costs.
GE decided in may to sell, or reduce its interest in Wizard and media reports this week suggested that the NAB would pay around $100 million for the distribution business and offices, but more if it took on the $12 billion loan book built up by Wizard. GE Australia was rumoured to have paid more than $400 million for Wizard (a figure of of $425 million was mentioned in some reports).
GE Money is struggling in Australia with the group unable to on-pass the 1% cut from the Reserve Bank on October 7 to its white label mortgages.
In a statement released a week later, GE said
GE Money has announced it is not able to pass on any of the Reserve Bank of Australia’s October cash rate reduction to mortgages sold through third party mortgage managers and brokers.
Managing Director Home Lending, Lisa Davis, said the decision was necessary as a direct result of the recent extraordinary rise in the cost of funds that has taken place in the financial markets.
Regrettably, GE Money is not immune to the global increase in the cost of funds,” Ms Davis said. “We source our funds on the international market and do not have access to a deposit base to draw on. The volatility in the market is unprecedented and our cost of funds has not come down since the cash rate was reduced last week.
We will continue to review this position as funding costs change.
GE has sold Japanese consumer loans and other assets to Shinsei Bank in July and in March agreed to sell finance companies in Germany and the UK to Spain’s Banco Santander in an asset swap valued at 1 billion euros.