Why GE Wants MetLife's Bank

MetLife's sale of most of its U.S. deposits to GE Capital Finance is a case of two big companies doing each other a solid.

Two big companies, that is, with opposite takes on banking.

MetLife Inc. wants out because of the added oversight from Washington. GE Capital's parent, General Electric Co., seeks a bigger slice of the U.S. market for midsize businesses, which it recently pegged at 195,000 companies delivering at least $3.8 trillion in annual gross domestic product.

The deal announced Tuesday — with almost no financial terms disclosed — says little about the broad health or direction of U.S. banking. It is not much of a harbinger for bank M&A, either; the industry has few players like MetLife with sizable holdings they want to dump. Most banks are hungry for assets — not liabilities.

What the deal speaks to is the strategic ends of companies with very different business models. MetLife is in insurance, a business that is already heavily regulated. The cost of extra scrutiny in banking trumps any profit it sees in borrowing money from depositors.

GE Capital, in turn, is the rare U.S. lender hard up for deposits. Its top aim is to extend credit to businesses with $10 million to $1 billion of annual sales, a customer segment that has spent the last three years stockpiling cash and cutting people, inventory and production. The deal is GE Capital's way of bracing for a much-anticipated wave of corporate borrowing and spending once the economy rebounds; it wants to fund new loans with its own deposits rather than wholesale sources. More in-house funding should mean fatter spreads.

The $7.5 billion of mostly certificates of deposits and money market accounts it would gain from MetLife upon the deal's scheduled closing in mid-2012 would not alter its business profile. It has no branches and is not getting any; MetLife's operations are online.

Its regulatory status would appear to stay the same, too.

GE Capital owns an industrial loan company regulated by the state of Utah and the Federal Deposit Insurance Corp. and has a thrift, a GE Capital spokesman says. It is acquiring MetLife Bank's deposits, not its national charter, he says. GE Capital would put the deposits in its ILC.

The Federal Reserve has some jurisdiction over GE Capital, too, which would not change.

What the deal would do is help change who GE Capital borrows from to finance the roughly $380 million in outstanding real estate, health care, aviation, consumer and other types of loans it had outstanding as of Sept. 30.

Right now it relies on a lot of bonds and commercial paper. It has had to rely on costly brokered funds in its new push to gather deposits on its own. Those are not the steadiest or most lucrative ways to fund assets. It is much better to rely on homegrown depositors because of the way the bond and commercial paper markets can fluctuate. Bonds also have to be paid off and rolled over every few years, too. GE Capital has about $80 billion in long-term debt maturing in 2012 alone.

The deal is an exception for other reasons, too.

With consumers saving and not borrowing, most traditional banks have more deposits than they need.

But GE Capital is one of the few companies in the market for this type of property. It set out to diversify its funding years ago, and recently announced plans to launch an online retail bank in 2012. This deal would help fulfill that goal.

It is also a good time to buy deposits, since low demand translates into low price. Sterne Agee & Leach Inc. Analyst Ben Elias said in a research note on Tuesday that GE Capital is likely paying "several multiples below" the dirt-cheap 3% premium he estimates Capital One Financial Corp. plans to pay for the deposits of ING Groep NV's online U.S. bank.

GE Capital is also deeply bullish on its prospects for 2012 despite the uncertainty in Europe and its own problems at home with U.S. real estate. Profits are on pace to more than double year over year in 2011, and it is forecasting double-digit profit growth in 2012.

"Business is really pretty strong," Mike Neal, GE Capital's vice chairman, president and chief executive, said during a presentation to investors on Dec. 6. Its new loans are "well-priced" and delivering some of the "best returns" he said has seen in his 33 years at GE.

Loan losses have been falling and should continue to do so, while property values and real estate demand have shown signs of firming up. GE's global reach gives it an edge over U.S. regional banks in winning new business clients, he said.

MetLife has been in online banking since 2001. Steven A. Kandarian, Metlife's president and CEO, said in press release that the sale is a "significant step" toward freeing it from bank holding company status, while ensuring its bank customers "continue to be served by a high-quality organization."

GE Capital intends to buy about $7.5 billion of MetLife's roughly $10.7 billion of deposits.

The deal does not include about $3 billion in custodial deposits associated with MetLife's mortgage business and certain other deposits that MetLife said would be transferred out of its MetLife Bank over the next six months.

MetLife has been looking for a buyer for its depository since July when it announced that it was abandoning its charter due to the increased costs and demands of complying with federal regulations. The company had initially intended to retain the mortgage business it acquired from First Horizon National Corp. several years ago, but then said in October that it planned to exit that business as well.