General Electric plans to separate from its longtime credit card unit in November, and to ask early next year to be released from heightened regulatory scrutiny, company executives said Friday.
GE is selling many of its financial services businesses in an effort to get out from under Washington's thumb. The firm expects to earn $18 billion to $21 billion by shedding its majority ownership in the credit card lender, Synchrony Financial, GE Vice Chairman Keith Sherin said during the industrial giant's quarterly earnings call.
The divestiture will happen under a process that General Electric plans to start next week and wrap up by Nov. 20. GE shareholders will be offered the chance to exchange their stock for discounted shares in Synchrony. The split-off will help set the stage for GE's request, to be filed with the Financial Stability Oversight Council, for the revocation of its designation as a systemically important financial institution.
"Our target is to file in the first quarter of 2016," Sherin said.
Although Stamford, Conn.-based Synchrony held an initial public offering in July 2014, GE still owns 85% of its shares.
In order to become fully independent, Synchrony needed regulatory approval of its application to become a stand-alone savings and loan holding company, and the Federal Reserve Board gave that blessing on Wednesday.
That new regulatory status will allow Synchrony to avoid, for now, one burden borne by most financial institutions its size.
Bank holding companies with more than $50 billion in assets are subject to the Fed's capital planning and stress testing program, which is formally called the Comprehensive Capital Analysis and Review.
Synchrony has $76 billion in assets, but Chief Financial Officer Brian Doubles said Friday that because the firm is a savings and loan holding company, rather than a bank holding company, it is not "technically subject" to the CCAR process.
"It is still our expectation that we are going to file a capital plan with the Fed, and it is going to be based on the Fed's CCAR assumptions," Doubles told an analyst during Synchrony's earnings call.
"So it is very likely that even though we are not part of the public process, we are going to follow a very similar process to the other banks, in terms of using the same assumptions, following the same timeline. And we think that gives us probably the best chance of success in 2016."
Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, asked Doubles whether Synchrony would follow the assumptions of CCAR but run them through the company's own stress-testing model.
"That is our expectation, exactly," Doubles responded.
That approach resembles the stress-testing method currently used by banks with assets between $10 billion and $50 billion.
In its order approving Synchrony's application to become a savings and loan holding company, the Fed noted that the company has developed its own stand-alone risk-management policies.
"These actions are considered acceptable from a supervisory perspective," the order states. "In addition, Synchrony Financial's management has the experience and resources to ensure that the organization can continue to operate in a safe and sound manner."
Matthew Anderson, managing director at Trepp LLC and an expert on bank stress-testing, confirmed that certain savings and loan holding companies with more than $50 billion in assets are not currently subject to the CCAR process.
He pointed to the holding companies for Charles Schwab Bank and the United Services Automobile Association, or USAA, as examples of other companies that are in a similar position as Synchrony with respect to stress tests.
During the third quarter, Synchrony reported net earnings of $574 million, up 5% from the same period a year earlier.
Loan receivables rose 12% to $63.5 billion, and purchase volume during the quarter grew by the same percentage to $29.2 billion. Loans that were at least 30 days past due fell to 4.02% of loan receivables, down from 4.26% in the third quarter of 2014.
But the firm's net interest margin fell to 15.97%, down from 17.11% a year earlier. And noninterest expenses rose by 16% from the third quarter of 2014, which company officials attributed partly to costs associated with the split from General Electric, as well as the conversion away from magnetic stripe credit cards.
Synchrony grew its deposit base from $32.7 billion in the third quarter of 2014 to $40.5 billion during the same period this year. The company got 63% of its funding from deposits, up from 54% a year earlier.
Synchrony plans to introduce a checking account and an online bill pay service next year, in an effort to hold onto more of its depositors, Doubles said.
"We continue to view this as a stable, attractive source of funding for the business," he said.