By Scott Malone
BOSTON (Reuters) - General Electric Co warned that turmoil in global credit markets could drive profit down as much as 12 percent this year, confirming Wall Street's fears about the vulnerability of the company's finance arm.
Two of GE Capital's biggest businesses are loans to mid-sized companies and investments in commercial real estate. Both businesses have been hammered by the credit crunch, which complicates closing real estate deals, while the slowing economy raises the risk of default on some of its loans.
GE plans to scale back its financial arm, including selling off more than $10 billion in real estate assets.
"We've never seen really a time of volatility like we've seen in the last month or so," Chief Executive Jeff Immelt told investors on a conference call.
He argued that the company was "performing well in a tough environment" and noted that its industrial operations -- which make heavy equipment like jet engines and electricity-producing gas turbines -- are on track for 10 percent to 15 percent profit growth.
Shares of the second-largest U.S. company by market capitalization were up about 3 percent at midday, with investors showing relief after pounding the shares down to five-year lows last week amid worries about the financial crisis. The climb came amid a broad rally in U.S. stocks.
"They've already been taken to the woodshed," said Shawn Campbell, principal at Campbell Asset Management in Chicago.
Wall Street has been focused on the market meltdown for the past few weeks, with many hopes pinned on a proposed $700 billion federal bailout plan.
GE's broad breadth of businesses is intended to make the conglomerate something of a bulletproof performer, able to exploit its sectoral and global diversification to ride out any downturn. But weakness at GE Capital, which accounts for about half its profit, has outstripped its industrial business.
Its shares are down about 31 percent so far this year, compared with the 17 percent slide of the broad Standard & Poor's 500 index .
"This is a capitulation quarter for GE as it acknowledges that it cannot escape the current credit market turmoil unscathed," Goldman Sachs analyst Deane Dray said in a note to clients.
Immelt warned investors that GE expects to see higher loss provisions at its financial unit as the economy slows.
The company aims to cut back its exposure to that sector, with a goal of relying on it for just 40 percent of its earnings by the end of next year.
To that end, GE plans to prune its $90 billion commercial real estate portfolio by more than $10 billion in 2009, said Chief Financial Officer Keith Sherin.
"Our real estate business is down," Sherin said, noting that the main risk left to the company's third-quarter earnings was how many real estate deals it is able to close in the next few days.
The credit crunch prevents GE from pulling back from finance as quickly as it prefers. Sherin said the company no longer expects to sell its $30 billion private-label credit-card unit.
But GE has no plans to exit finance entirely.
"Financial services isn't going to be out of favor forever. It's a significant part of the economy," Sherin said.
GE said it would earn between 43 cents and 48 cents per share in the third quarter, down from a previous outlook of 50 cents to 54 cents.
For the full year, it forecast earnings of $19.5 billion to $21 billion, or $1.95 to $2.10 per share, compared with its previous expectations of $22 billion to $23 billion, or $2.20 to $2.30 per share.
Immelt said GE would stop buying back shares to conserve money and allow it to lower GE Capital's leverage.
The company this year kicked off a $15 billion stock buyback plan. At the end of the second quarter, it had bought back about $2.5 billion of shares, according to a spokesman. GE's market value is about $257 billion, trailing only Exxon Mobil Corp in the United States.
Standard & Poor's affirmed the company's credit ratings shortly after the announcement.
GE shares were up 84 cents to $25.43 on the New York Stock Exchange, above last week's five-year low of $22.19, but well off their 52-week high of $42.15 set last October.
Some investors worried that GE's news could presage a wage of profit warnings.
"I expect that in this pre-earnings season we're going to see a lot of these sort of announcements and I think the market is aware of that," said Peter Cardillo, chief market economist at Avalon Partners in New York.
"The credit crunch has really been severe and it's taken its toll on the economy and corporate America," he added. "I think we're a headed for a very sour third-quarter earnings season."
(Additional reporting by Helen Chernikoff, Christopher Kaufman, Blaise Robinson and Ellis Mnyandu; Editing by Derek Caney and Maureen Bavdek)