Fitch: GE Divestment Highlights SIFIs' Capital Allocation Focus

NEW YORK--(BUSINESS WIRE)-- General Electric's planned divestment of the majority of GE Capital Corporation (GECC) highlights the increasing capital allocation focus for U.S. systemically important financial institutions (SIFIs), says Fitch Ratings. Fitch believes that management's key aim with the divestitures is to boost GE's equity valuation through the disposal of substantial parts of GECC while refocusing on its core industrial businesses. GE will also seek de-designation as a SIFI, which if successful, should reduce the additional capital requirements and compliance costs associated with stricter oversight.

GECC is unique among U.S. SIFIs in that the majority of its businesses, namely middle-market lending, commercial real estate and consumer lending, are not highly synergistic with its parent's focus on industrial technology. The strategic move is therefore unlikely to set a precedent for other U.S. SIFIs that have much more synergistic and interconnected operations. Nevertheless, tougher regulatory scrutiny for banks that have the systemically important designation has resulted in a stream of divestments aimed at more efficiently allocating their capital.

Post-crisis, many banks have exited businesses due to regulatory restrictions, or because less synergistic or highly capital intensive operations are deemed not worth the regulatory scrutiny and costs. Examples include exits from mortgage servicing, student lending, physical commodities trading, and balance sheet investments in alternative investments, among others. These assets have largely shifted to the less regulated non-bank financial institutions sector, but the non-bank financial sector's appetite for large-scale asset acquisitions may diminish as those non-banks get larger, especially if they want to avoid the scrutiny of a SIFI designation.

In Fitch's view, alternative investment firms are among the potential beneficiaries of GE's plans, particularly those with the size and platform diversity to absorb assets coming out of GECC. Blackstone's ability to place a significant amount of GECC's real estate portfolio across its various funds is the clearest example of this. However, alternative investment managers with credit-oriented funds may also be active buyers of GECC's middle-market loans, should these be available via asset sales rather than platform sales. Other middle-market lenders (such as regional banks, Madison Capital, Golub Capital, CIT, and business development companies) could benefit from the exit of the sector's most dominant lender.

International banks without a significant U.S. presence or a desire to deploy deposits outside of their home countries may also be active participants in the sale of GECC's remaining U.S. assets. There would also be opportunities to buy GECC's assets in overseas markets, primarily in Europe.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Source: Fitch Ratings

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