Sumitomo Mitsui Financial Group Inc., one of the many recent Japanese companies looking to invest in the American market, is keen to purchase General Electric Company (NYSE:GE) ’s U.S. railway-leasing business.
Though GE Capital Rail Services, worth around $4 billion, has some interest from Wells Fargo and other American banks, SMFG is intent on investing in rail leasing through GE. The bank wants to invest in rail leasing because it is a higher margin business than its departments back home. It could also open doors in the American market for future contracts with U.S businesses.
SMFG’s actions are not abnormal for many liquid Japanese financial institutions, which are investing in foreign markets and diversifying their portfolio with force. This is due to puny growth figures and the lack of general confidence in the Japanese economy. Although lending has increased in recent months, the spreads are still too small to spur growth.
The timing of SMFG’s offer comes as welcome relief to GE Capital, who has an enormous collection of assets to sell. According to Jeff Immelt, GE Chief Executive, this sell-off is due to the decision to mostly dissolve GE Capital. This is not unreasonable, however, as despite being profitable, GE Capital does have the returns to rise above GE’s overall cost of capital. The causes are varied yet the pressure of new financial regulations by the federal government have driven returns lower. The move will destroy what was once the seventh-largest bank.
The selloff, which will be completed over the next two years, will make 90% of GE’s earnings come from industrial businesses when GE Capital used to be 50% of earnings.
The restructuring can be seen as both as good and bad. The fact that the risk inherent in the lending arm GE Capital will be gone, especially after the financial crisis, will provide a sense of security. Yet the company will not be as diversified as it once was, and could be liable to risk if the industrial arm of the company suffers.
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