GE Money: Feeling the GE force

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By:
Sudip Roy
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GE Money, the consumer finance and banking arm of General Electric, is growing quickly in central and eastern Europe. Sudip Roy talks to two of the firm’s senior executives about its expansion plans.

An emerging markets powerhouse

EUROPEAN INSTITUTIONS DOMINATE the competitive central and eastern European banking market. Italy’s UniCredit, Austria’s Erste and Raiffeisen, Belgium’s KBC and France’s Société Générale are by far the biggest international banks in the region, with a combined total asset pool of $290 billion. The US banks, in contrast, are largely conspicuous by their absence. There are two exceptions, though. One is the ubiquitous Citi. The other is the equally ubiquitous but perhaps less flamboyant GE Money, the consumer finance and banking arm of the industrial conglomerate General Electric.

Over the past 15 years, GE Money has established itself as a coming force in emerging Europe. It now has a presence in eight countries (the Czech and Slovak Republics, Hungary, Latvia, Poland, Romania, Russia and Turkey) achieved primarily through acquisitions and strategic partnerships – a policy it has replicated throughout its international businesses. "We’ve grown through 90 acquisitions," says Dave Nissen, chief executive and president of the firm – and in a relatively short amount of time. "GE Money didn’t really exist outside the US until the early 1990s so it’s a relatively young business," he adds.

In central and eastern Europe, the firm’s growth has accelerated, especially since the turn of the century. In 1999 GE Money had about $2 billion of total assets; today that figure is $23 billion. That compares with total assets of $88.7 billion in the EMEA region.

Its profitability in CEE is equally impressive. In 2004 its net income was $230 million; in 2006 it was $428 million. The 2007 results have yet to be announced but GE Money’s executives are confident that its strong performance will continue.

"We have had a phenomenal track record in central and eastern Europe dating back to 1994-95," says Dmitri Stockton, head of GE Money’s CEE business.

The firm first entered Austria before turning its attention to other countries in central Europe. As its presence has expanded, so GE Money’s strategy has developed.

"We have had a phenomenal track record in central and eastern Europe dating back to 1994-95. We have evolved initially from a consumer finance business and are now focused on becoming a top-five player in universal banking"
Dmitri Stockton, GE Money
Dmitri Stockton, GE Money
"We have evolved initially from a consumer finance business and are now focused on becoming a top-five player in universal banking," says Stockton. That means focusing beyond core products such as credit cards, mortgages and auto loans and doing more business in such areas as lending to small and medium-sized enterprises and financing infrastructure projects.

Not that the core businesses are lagging. The firm’s auto loans business is delivering 25% a year growth, and the mortgage business is growing at a staggering 70% a year.

Opportunistic strategy

One of the defining features of GE Money’s strategy is its ability to act quickly. "Throughout its history, GE has been an opportunistic firm," says Nissen. "Our strategy changes according to market conditions."

There is no one-size-fits-all, predetermined approach to the region. Stockton highlights the firm’s Czech concern as an example of a more gradual approach to building a business. The firm entered the country in the late 1990s, buying three small companies and integrating them. "It was a more traditional route," says Stockton. "We invested in products and in distribution. We put in place the right risk management practices." In the decade since, GE Money in the Czech and Slovak Republics has built up more than $2 billion in assets, providing services including personal loans, sales finance and auto leases.

In Latvia, too, the firm is taking a measured approach. In 2004 it bought RD Lizinga Grupa, a leading provider of micro-loans. Last year it followed this with the purchase of Baltic Trust Bank. Although BTB is only Latvia’s 14th-biggest bank in terms of total assets, it is top five by number of branches. The US firm is keen to continue making further investments in the Baltic state.

In contrast, in other markets, such as Poland and Turkey, GE Money has adopted a more big-bang approach through a high-profile acquisition and a strategic partnership. In Poland, for example, the firm will augment its existing GE Money Bank business by buying a 66% stake in New BPH from UniCredit for €625.5 million. The agreement, Stockton reckons, will be finalized in the first quarter of 2008, pending regulatory approval.

New BPH is the outcome of a spin-off of a portion of Bank BPH, comprising 200 branches, into Bank Pekao. Both Bank BPH and Pekao fell into UniCredit’s hands following the Italian firm’s purchase of Germany’s HVB. However, Polish regulators were concerned that the transaction gave UniCredit too much power and insisted on the subsequent disposal of some of BPH’s assets. UniCredit will retain a stake of just over 5% in New BPH. GE Money is also taking a 49% stake in BPH TFI, the asset management arm, from Cabet Holding, a wholly owned subsidiary of Bank Austria Creditanstalt.

Stockton says that the Poland business might receive up to a quarter of the firm’s intended $200 million to $225 million investment outlay earmarked for central and eastern Europe next year. He adds that GE Money plans to make similar investments in Poland in subsequent years.

The two combined businesses – GE Money Bank and Bank BPH – will rank fifth in terms of lending assets after the transaction. The two banks will have 330 branches and Stockton says the plan is to add another 200 over the next three years.

The BPH "deal was in the ship zone in what we are looking to achieve," he adds, pointing out that the firm will be able to provide services including consumer finance, SME lending, e-banking, leasing, factoring and other aspects of retail and corporate banking. "Poland will be one of the biggest businesses in GE Money." The new company will probably be quoted on the stock exchange in the first half of 2009, he adds.

Strategic partnership

In Turkey, GE Money has established itself through a strategic partnership of equals with Dogus Group, one of the leading local conglomerates, in Garanti Bank.

The deal, which was struck in December 2005, involved GE’s acquisition of half of Garanti Bank’s ordinary shares held by Dogus Group – a 25.5% stake for a cash consideration of $1.55 billion. In addition, GE purchased 49.2% of Garanti Bank’s founders’ shares for a further $250 million.

The partnership gives GE a quick entry point into one of emerging Europe’s most exciting banking markets without the hassle or the cost of an outright purchase. "The shareholders didn’t feel they could afford to buy 100% [of Garanti]," says Nissen, who adds that the Turkish bank was not for sale in any case.

Stockton says that the partnership gives GE a platform in Turkey that is difficult to achieve through small incremental acquisitions. "It gives us scale in a high-growth market. We wouldn’t be able to achieve that if we adopted our Austria strategy [where GE grew through the acquisition and merger of two small financial institutions]."

Garanti is the third-biggest private bank in Turkey, with nearly 6 million customers and more than 450 branches. It has particularly strong relationships with Turkey’s leading companies.

The relationship with the Dogus Group is not limited to banking. The two companies have a commercial real estate partnership too. Nor is the relationship limited to Turkey. The partners are planning to roll out universal banking products in Romania, for example. GE Money already operates three specialist financial services businesses in the country, all bought in May 2006 – Domenia Credit, a loan mortgage provider; Estima Finance, a consumer finance company; and Motoractive Leasing, Romania’s leading leasing firm.

Stockton says the next country on the radar screen for the partnership is Ukraine. "We like the country’s growth dynamics and we are evaluating the market," he says.

He adds: "We have some targets in mind. We believe we will enter the market and build a meaningful business over time."

Growth focus

Aside from Ukraine, the firm has no other new markets in mind in the region (although it has ambitions to build its Middle East and Africa franchise by expanding into Saudi Arabia and Egypt). The focus instead will be on growing existing businesses, including those in Russia, arguably the region’s most important market. There GE Money has a presence through Deltabank, a consumer finance specialist that it bought in 2004.

One of Deltabank’s most successful products is Visa card. Last January, the company began issuing credit cards through mobile kiosks in the Moscow supermarkets of the Ramstore chain. Deltabank sells products through other established retail outlets too, such as Ikea.

On the Deltabank acquisition, Stockton says: "We wanted to buy a platform and then grow it organically. We got the right risk management toolkit in place. We have expanded the product line. We started with $45 million of assets. By the end of this year [that figure] will reach $600 million and next year it will be more than $1 billion."

Dave Nissen, GE Money"One of the advantages we have is that we can move our investment focus around the globe based on opportunities we see at the time"
Dave Nissen, GE Money
Both Stockton and Nissen acknowledge the risks of investing in Russia but are optimistic. "No doubt in the long term there is huge potential in Russia," says Nissen.

Stockton adds: "We were one of the first [international] entrants into Russia, albeit through a small platform that’s growing. I wouldn’t rule out making a further acquisition there."

Too expensive by half

One of the problems facing GE is that it’s still very much a seller’s market, so any deal in Russia or elsewhere in the region would cost plenty of money. The few remaining independent large banks in the region would come at a premium, although unexpected events might reduce their valuation levels and make them more vulnerable. Certainly GE has no intention of paying over the odds, no matter how enticing the potential prize. Indeed, Nissen says there have been quite a few instances when the firm has pulled out from a bid because of the valuation.

"There are quite a few [bids] we wish we’d won but I’m most pleased about some of the deals that we didn’t end up doing as the price was too steep," he says without elaborating further.

But while valuations are not attractive right now what about the future? Would the firm consider a potentially transformative deal, perhaps making a bid for the regional assets of one of the European banks – if not a leading light such as Erste then a mid-tier institution such as ING or IntesaSanpaolo? Or would it try to acquire the region’s most prestigious local player, OTP, a bank it was rumoured to have been considering a few years ago?

Neither Nissen nor Stockton will talk about specific rivals but, in general, remain open-minded about the possibility of a landmark transaction. "One of the advantages we have is that we can move our investment focus around the globe based on opportunities we see at the time," says Nissen. "We’ll be patient." Stockton says: "We are always interested in doing a transformation-type deal but equally we are making a big push on organic growth."

Nissen acknowledges that the firm needs to increase its critical mass in all of its main markets. Whatever move GE Money makes next, if it continues to develop at its present rate, its European rivals will soon begin to look nervously over their shoulders.