|GE CEO Jeff Immelt|
FAIRFIELD, Conn. ( TheStreet) -- GE Capital continued to shore up its balance in the third quarter, while earning $1.5 billion, which was a 79% year-over-year increase. While bashing GE capital has become a celebrated cause, there's no denying its importance to General Electric ( GE), as GE capital provided 44% of the parent company's third-quarter operating profit of 31 cents a share.
GE Capital's third-quarter revenue totaled $11.15 billion, increasing slightly from a year earlier. The division was profitable across all business lines except for real estate lending, with a third-quarter loss of $82 million, which was greatly reduced from a $405 million loss in the third quarter of 2010. Consumer lending and leasing profit increased 55% year over year to $688 million in the third quarter, while Energy Financial Services profit increased 44% to $79 million (despite a 24% year-over-year decline in revenue to $221 million), while GE Capital Aviation Services saw a 32% year-over-year profit increase, to $208 million. GE reported that commercial lending and leasing origination volumes were up 31% year-over-year and that the pipeline of loans in process was continuing to grow. GE CEO Jeff Immelt said that "GE Capital's margins remained strong at 5.4% year-to-date and the business continues to benefit from the credit cycle recovery. GE Capital continued to strengthen its capital ratios and liquidity during the quarter." Immelt added that the Tier 1 common equity ratio for GE Capital was 11.0% and for General Electric Capital Corporation was 9.6%, and that GE's financial services segment had "reduced leverage across the portfolio." Another sign of the dramatic strengthening of GE Capital's balance sheet was a reduction in the segment's adjusted leverage ratio to 4.4 as of Sept. 30, from 5.5 in Sept. 2010. GE Capital's adjusted book debt declined to $367.2 billion as of Sept. 30 from $412.7 billion a year earlier, while adjusted book equity increased to $83.7 billion, from $79.6 billion. GE Capital continued to unwind its real estate exposure, with total real estate loans declining 14% year-over-year to $64.4 billion. GE Capital's total assets were down 1% year-over-year, to $571.3 billion as of Sept. 30. Credit quality continued to improve, with non-earning assets of $9.9 billion, or 3.29% of financing receivables, declining from 3.32% the previous quarter and 3.69% a year earlier. The ratio of total write-offs to financing receivables for the third quarter was 1.71%, improving from 1.78% the previous quarter and 2.15% a year earlier. GE Capital's allowance for loan losses declined to $6.7 billion as of Sept. 30 from $7.1 billion the previous quarter, directly boosting earnings for the segment. Despite the reserve release, reserve coverage was strong, at 2.2% of total finance receivables. One of the biggest questions -- and potentially a catalyst for GE shares -- would be the reinstatement of a dividend from GE Capital to the parent company. There had been chatter on Wall Street earlier this year that the GE Capital unit might begin paying a dividend up to GE this year, but more recently, the conventional wisdom backed this event up to 2012. GE confirmed the 2012 timeline on the earnings call, and gave its view of the challenge it faces in meeting this goal. GE said on the call that industrial cash will rise next year, as growth of industrial cash from acquisitions and growth in earnings will offset the NBC Universal divestiture. However, GE noted that with the Federal Reserve begining its oversight of GE this summer, that "it's early in the process for them to understand us, so the objective is still the same, and there is lot of work to do to get there. We expect to have lots of cash to allocate in 2012." Immelt stepped in during the discussion of the dividend and Fed regulation to downplay the Fed's role in potentially holding up plans to reinstate the GE Capital dividend to the parent, saying that the GE dividend is key for investors and an "extremely strong" priority for GE and its board, separate from the issues related to Fed oversight. The dramatic improvement in profitability for GE Capital Aviation and improved commercial origination volume are hopeful signs for coming quarters. GE Capital's strategy of moving away from real estate exposure is obviously a good one, and over the long haul, growing its business of providing financing to customers purchasing the parent company's industrial products adds an additional layer of long-term, stable profitability for General Electric. -- Written by Philip van Doorn in Jupiter, Fla. To contact the writer, click here: Philip van Doorn.
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