Bad debt blowout drag on GE
IN a clear sign that credit conditions have taken a turn for the worse, a blowout in bad debts has resulted in a profit slump for the local consumer and business finance operations of GE
Loan impairment losses for GE Capital Finance Australasia, which bought AGC from Westpac five years ago, jumped 54 per cent from $185 million to $285 million.
Along with a higher tax bill, this contributed to a 31 per cent slide in net profit from $159 million to $109 million.
The GE division, with total loans and advances of $13 billion, up from $12 billion, represents only part of the fast-growing group in Australia.
Apart from AGC, the unit includes credit-card services, the Custom Fleet leasing and fleet management business purchased from National Australia Bank for $550 million, and general and life insurance activities. It does not include Wizard Home Loans.
GE representatives were unavailable for comment on the accounts, lodged yesterday with the Australian Securities and Investments Commission.
However, the GE Capital Finance numbers are consistent with warnings from the nation's big-bank chief executives in the recent interim profit reporting season that the credit cycle had turned, with stresses appearing in unsecured lending and credit-card operations, in particular.
ANZ boss John McFarlane said he expected provisions to be higher in the second half, with the first half unusually low due to recoveries.
NAB chief executive John Stewart said he was most concerned about the consumer space.
"The consumer is getting overextended with debt in certain pockets and that will always come out in danger areas like credit cards and unsecured lending," Mr Stewart said.
JP Morgan banking analyst Brian Johnson said yesterday personal lending loss rates were rising "quite dramatically", as shown by provisions at the GE unit rising to 219 basis points (as a percentage of total loans and advances).
Comparative rates for the big-four banks were far lower, at less than 20 basis points, but this was because of their massive, low-risk home lending books.
Mr Johnson estimated credit-card losses were running at about 260 basis points.
"Westpac's sale of AGC is now shown to be a pretty good decision, despite the short-term dilution in earnings per share at the time," he said.
"The banking industry is now exiting the optimal part of the cycle, and things will get worse from here."
GE's tax bill in 2006 was sharply higher, up from $18 million to $70 million. Unlike 2005, when it took a $39 million benefit from paying too much tax previously, the business had to stump up an extra $6 million.
Total assets at the end of last year came to $17.1 billion, up from $14.5 billion.
Finance income was relatively steady at $1.62 billion, but non-interest income doubled from $387 million to $767 million.
The biggest contributor was operating lease rental income, largely from Custom Fleet, which surged from $74 million to $223 million.
Custom Fleet contributed $167 million in revenue and a net loss of $2 million to the group from August 1 last year.
The total asset base for the GE group in Australia is estimated to be about $40 billion, up from $8 billion five years ago.
GE Capital Finance directors said they expected to grow the business further this year.
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