GE 2012 Annual Report Download - page 128

126 GE 2012 ANNUAL REPORT
notes to consolidated financial statements
CREDIT QUALITY INDICATORS
Substantially all of our Commercial financing receivables port-
folio is secured lending and we assess the overall quality of the
portfolio based on the potential risk of loss measure. The metric
incorporates both the borrower’s credit quality along with any
related collateral protection.
Our internal risk ratings process is an important source of
information in determining our allowance for losses and rep-
resents a comprehensive, statistically validated approach to
evaluate risk in our financing receivables portfolios. In deriving
our internal risk ratings, we stratify our Commercial portfolios
into 21 categories of default risk and/or six categories of loss
given default to group into three categories: A, B and C. Our
process starts by developing an internal risk rating for our bor-
rowers, which are based upon our proprietary models using data
derived from borrower financial statements, agency ratings,
payment history information, equity prices and other commer-
cial borrower characteristics. We then evaluate the potential
risk of loss for the specific lending transaction in the event of
borrower default, which takes into account such factors as
applicable collateral value, historical loss and recovery rates for
similar transactions, and our collection capabilities. Our internal
risk ratings process and the models we use are subject to regu-
lar monitoring and validation controls. The frequency of rating
updates is set by our credit risk policy, which requires annual
Risk Committee approval. The models are updated on a regular
basis and statistically validated annually, or more frequently as
circumstances warrant.
The table below summarizes our Commercial financing receiv-
ables by risk category. As described above, financing receivables
are assigned one of 21 risk ratings based on our process and then
these are grouped by similar characteristics into three catego-
ries in the table below. Category A is characterized by either high
credit quality borrowers or transactions with significant collateral
coverage which substantially reduces or eliminates the risk of
loss in the event of borrower default. Category B is characterized
by borrowers with weaker credit quality than those in Category A,
or transactions with moderately strong collateral coverage which
minimizes but may not fully mitigate the risk of loss in the event
of default. Category C is characterized by borrowers with higher
levels of default risk relative to our overall portfolio or transac-
tions where collateral coverage may not fully mitigate a loss in
the event of default.
Secured
December 31 (In millions) A B C Total
2012
CLL
Americas $ 68,360 $1,775 $2,382 $ 72,517
Europe 33,754 1,188 1,256 36,198
Asia 10,732 117 372 11,221
Other 161 — 94 255
Total CLL 113,007 3,080 4,104 120,191
Energy Financial
Services 4,725 — — 4,725
GECAS 10,681 223 11 10,915
Other 486 — — 486
Total $128,899 $3,303 $4,115 $136,317
2011
CLL
Americas $ 73,103 $2,816 $4,586 $ 80,505
Europe 33,481 1,080 1,002 35,563
Asia 10,644 116 685 11,445
Other 345 — 91 436
Total CLL 117,573 4,012 6,364 127,949
Energy Financial
Services 5,727 24 18 5,769
GECAS 10,881 970 50 11,901
Other 1,282 — — 1,282
Total $135,463 $5,006 $6,432 $146,901
For our secured financing receivables portfolio, our collateral
position and ability to work out problem accounts mitigates our
losses. Our asset managers have deep industry expertise that
enables us to identify the optimum approach to default situa-
tions. We price risk premiums for weaker credits at origination,
closely monitor changes in creditworthiness through our risk
ratings and watch list process, and are engaged early with dete-
riorating credits to minimize economic loss. Secured financing
receivables within risk Category C are predominantly in our CLL
businesses and are primarily composed of senior term lending
facilities and factoring programs secured by various asset types
including inventory, accounts receivable, cash, equipment and
related business facilities as well as franchise finance activities
secured by underlying equipment.
Loans within Category C are reviewed and monitored regu-
larly, and classified as impaired when it is probable that they
will not pay in accordance with contractual terms. Our internal
risk rating process identifies credits warranting closer monitor-
ing; and as such, these loans are not necessarily classified as
nonearning or impaired.
Our unsecured Commercial financing receivables portfolio is
primarily attributable to our Interbanca S.p.A. and GE Sanyo Credit
acquisitions in Europe and Asia, respectively. At December 31,
2012 and 2011, these financing receivables included $458 million
and $325 million rated A, $583 million and $748 million rated B, and
$452 million and $596 million rated C, respectively.