How Big Is GE Capital?

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BUSINESS

How Big Is GE Capital? It Depends

Company uses its own metric to value finance arms assets, saying it
helps investors better understand how GE Capital is becoming
smaller

http://www.wsj.com/articles/ge-uses-own-metric-to-value-its-finance-arms-assets-1433842205[7/4/2015 2:49:34 AM]

How Big Is GE Capital? It Depends - WSJ

General Electric went public with its 'ending net investment' number during the financial crisis, after Chief
Executive Jeff Immelt came under pressure to shrink GE Capital.
PHOTO: BLOOMBERG NEWS

By
TED MANN

June 9, 2015 5:30 a.m. ET

7
COMMENTS

Warning: Assets in General Electrics finance business may be larger than they appear.
In a letter to the Federal Reserve in May, General Electric Co. said its finance arm had $501
billion in total assets at the end of 2014, enough to rank it as the countrys seventh largest bank.
But just weeks earlier, GE had used a different number$363 billionin a presentation to
investors and analysts.
For a bank, assets mainly mean loans, and the total is a key measure of its scale.
The
$138 billion separating the two figures is the difference between what official accounting
rules requirethe number GE sent to the Fedand the in-house metric the company rolled out
seven years ago
when it was under pressure in the middle of the financial crisis to show it had
its vast lending business under control.
GE calls the
figure ending net investment, or ENI, and says it helps investors better
understand how GE Capital is becoming a small, more focused finance company.

http://www.wsj.com/articles/ge-uses-own-metric-to-value-its-finance-arms-assets-1433842205[7/4/2015 2:49:34 AM]

How Big Is GE Capital? It Depends - WSJ

A turbulence control structure at the GE Aviation Test Operations facility in Peebles, Ohio.
PHOTO: LUKE
SHARRETT/BLOOMBERG NEWS

The company used the metric liberally this spring when it threw in the towel and decided to exit
most of its finance operation altogether.

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To
accounting experts, however, it is another in a long line of pro
forma figures that
companies have trotted out over the years to show their business in a better light than possible
under generally accepted accounting principles.
GE does report total assets as well. But in slides, investor discussions and forecasts, it
consistently refers to ENI.
We
disclose ENI in addition to total assets so that our investors can better assess our total
capital invested in financial services, GE spokesman Seth Martin said.
Separately Tuesday, GE said it has agreed to sell its private-equity-lending unit to Canada
Pension Plan Investment Board in a deal valued at about $12 billion.

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How Big Is GE Capital? It Depends - WSJ

Pro forma reporting really took off in the 1990s, and after
dropping off in the wake of the dotcom bust, is back on the upswing, according to Ben Whipple, an assistant professor of
accounting at the University of Georgia who has researched the subject.
Mr. Whipple
and several collaborators went through nearly 130,000 earnings announcements
filed with the Securities and Exchange Commission from 2003 through 2013. They found that
nearly 50% of those announcements used a pro forma earnings per share metric in 2013, up
from about 20% in
2003. The research didnt track other kinds of pro forma figures,
such as
GEs ENI number.
In the best case, pro forma metrics can reveal details that might be lost in official figures, he

said. Consumer products companies, for instance, regularly report sales excluding currency
effects to show the strength of underlying demand. But the problem for investors is that, by
definition, there arent
any rules for coming up with pro forma data.
The discretionary nature of non-GAAP reporting might allow some firms to simply use metrics
that portray firm performance in a more favorable light and that are not necessarily better
measures of performance, Mr. Whipple said in an email.
To come up with
ENI, GE counts up the assets in its lending businesses, then subtracts liabilities
that dont require it to pay interest, like accounts payable or insurance reserves. GE says that
provides a better measure of
the positions on its books that it has to fund, whether with deposits
or with money borrowed in the market.

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How Big Is GE Capital? It Depends - WSJ

GE to Sell Buyout Unit to Canada Pension Fund for $12 Billion

The company has changed the way it reports ENI over the years. In 2011, it began reporting ENI
with the value of cash and other liquid investments excluded, which the company said reflected
the fact that investors werent as concerned about the size of GE Capitals cash holdings.
However arrived at, the figure is unusual. GE is the only publicly traded company that regularly
refers to
ENI, according to a search of corporate transcripts from S&P CapitalIQ. Mr. Whipple
hadnt heard of it. Neither had officials at the Fed or banking analysts on Wall Street.
To be sure, some banks use their own pro forma calculations when describing their portfolios
for investors, for instance by separating their core loan portfolios from assets they are winding
down. Like GE Capital, those banks must reconcile their pro forma numbers with GAAP in
their public filings.
GE Capital began using ENI internally years ago as a way to assess the value of its loans for
their earning potential, rather
than only by their dollar value.
GE went public with the number during the financial crisis, after CEO Jeff Immelt came under
pressure to shrink GE Capital. The first use was in
December 2008, when GE Capitals thentreasurer Kathy Cassidy told investors that GE would cut the size of GE Capitals ENI by $45
billion to about $500 billion by the end of 2009. Previously, Mr. Immelt had quantified GE
Capital in terms of total assets.
In GEs annual filing with security regulators for 2009, it reported total GE Capital assets of
more than $650 billion. ENI, minus the effect
of foreign exchange, was $472 billion and
showed more progress in terms
of GEs promise to shrink the business, down 10% compared
with a 1.6% decline in total assets. Since the beginning of 2010, ENI excluding
cash has fallen
31%, while total assets have dropped only 23%.
GE
says that focusing on ENI gave investors the information they wanted over that period.
While GEs metric showed a smaller overall size of GE Capital, it excluded less risky holdings
like accounts payable and
focused on the riskier pool of outstanding loans that investors wanted
to shrink.
When GE announced plans to sell off most of its financial operation in April, the company
presented a pair of graphs showing the size of what it was selling and what would remain. What
http://www.wsj.com/articles/ge-uses-own-metric-to-value-its-finance-arms-assets-1433842205[7/4/2015 2:49:34 AM]

How Big Is GE Capital? It Depends - WSJ

it was selling amounted to about $275 billion, and what it plans to hold was worth about $85
billion. That was in ENI.
A month later, GE Capital Chief Executive Keith Sherin included the same graphs in a letter to
the board of the Federal Reserve. The colors and labels were identical, but all the numbers,
expressed in total assets, were different. The businesses GE Capital plans to sell amounted to
about $360 billion. Those it expects to hold on to were about $140 billion.
Companies have broad leeway to use their own financial metrics with investors that wouldnt
pass muster with regulators, as long as they are explained.
By contrast, regulators like the Fed or the SEC require companies to report their financial
performance in adherence with accounting standards set by professional organizations.
Investors can prefer that consistency, too.
Every time I had a financial services person talk to me, they would say, Why dont they just
report assets? said longtime GE analyst Deane Dray, who currently works at RBC Capital
Markets. It always highlighted that GE was not reporting on the same basis
as the banks.
Write to Ted Mann at ted.mann@wsj.com

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