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MetLife completes sale to GE Capital

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MetLife has completed the sale of its bank to GE Capital, a transaction which removes it at least temporarily from oversight by federal regulators.

MetLife notified depositors at its bank that their deposits would be transferred last Friday, and Steven Kandarian, chairman, president and CEO disclosed the completion of the deal before the stock market opened this morning.

A total $6.4 billion in retail deposits were transferred.

“The closing of the transaction with GE Capital Retail Bank is an important step in the process of exiting retail banking and allows MetLife to maintain its strategic focus as a global insurance and employee benefits leader,” Kandarian stated.

The transaction was approved by the Office of the Comptroller of the Currency (OCC) on Dec. 12, 2012. MetLife “has begun to take the necessary administrative steps to deregister as a bank holding company,” Kandarian said.

The tone and substance of Kandarian’s remarks confirm that the bank is doing everything it can to escape federal regulation.

Some industry officials have even speculated that MetLife has threatened federal regulators with a legal challenge if they seek to designate MetLife as a systemically significant organization SIFI under the Dodd-Frank Act.

Analysts and Washington insiders believe that the Federal Stability Oversight Council (FSOC), which has the authority to do so, is eyeing MetLife, American International Group and Prudential Financial, as well as GE Capital, as the first non-banks to be designed as SIFIs.

That means it will be subject to consolidated regulation by the Federal Reserve Board.

Interestly, Moody’s Neil Strauss says that removal of the bank holding company structure would be credit negative because under Fed supervision, it says MetLife is more likely to retain earnings and capital and in a severe stress situation the Fed could provide MetLife with capital or liquidity support.

Strauss did say that “removal of the Fed regulatory jurisdiction does afford MetLife operations more business and financial flexibility, making it better able to compete with peers unburdened by the strictures of Fed supervision and thus more able to generate greater diversity of earnings and more interest from equity investors. But all told, losing the Fed umbrella weighs more heavily as a credit negative than the gains to MetLife from a credit perspective.”

Any reprieve for MetLife from Fed overview is likely to be only temporary as MetLife, in our view, remains a strong candidate to be designated a non-bank systemically important financial institution. Therefore, notwithstanding its plans to “de-bank,” MetLife would likely ultimately be subject to Fed regulation.

It was anticipated that the first non-bank SIFI would be designated in December, but the FSOC is apparently delaying action to get its legal ducks in a row after being told that certain institutions it was examining as potential SIFIs would file a legal challenge if so designated.

MetLife began the processing of selling its bank and therefore ending its status as a bank holding company early last year, after the Fed found through a stress test imposed on large financial institutions that it believed MetLife was inadequately capitalized.  In March of last year, Met was one of four large financial institutions deemed to have failed the stress test imposed by the Federal Reserve Board, a decision roundly criticized by MetLife and insurance analysts.

That barred MetLife from buying back stock and raising its dividend, which MetLife officials, led by Kandarian, thought was inappropriate. 

John Nadel, an analyst at Sterne Agee and Leach, and Sean Dargan, an analyst at Macquarie Capital, both in New York, have both predicted that MetLife would ultimately be designated a SIFI.

Nadel added that, “Immediately after, we expect MetLife will file with the Fed to de-register as a bank holding company, a process we understand should take a few weeks.”

Nadel said that as a result, MetLife will officially “de-bank” in the first quarter.

Moreover, “given the approval has been granted, we expect the Fed will exempt MetLife from submitting to the 2013 bank stress test examination.”

In an investor’s note in December, Nadel said that, “Some investors have argued the bank sale doesn’t necessarily change things for MetLife—that it doesn’t, by itself, mean that MetLife will be able to begin returning capital to shareholders through buybacks and/or increased dividends.”

Nadel added that, “While formally this argument is probably valid, in our view, the psychological benefit alone of knowing the saga of de-banking is behind the company has real value to longer-term investors, particularly those who have grown more and more frustrated over the last year or more with the seemingly never-ending delays in reaching a conclusion on this issue.”

Moreover, Nadel said, “while we expect MetLife will ultimately be designated a non-bank SIFI, we continue to believe the stress-testing process for insurance company SIFIs will recognize the inherent differences between insurers and banks, and thus the outcome is likely to be more favorable.”

Dargan essentially said the same thing in his investor’s note. He said MetLife is pointing to $4.8-$5.8 billion of holding company cash and liquid assets at the end of 2013.

“If the non-bank SIFI standards are at all tailored to an insurer’s balance sheet and if MetLife is judged to have excess capital, we see upside to our 2013 estimate, which now assumes no share repurchase.”

A $1 billion share repurchase spread throughout the year would add 1% to our 2013 estimated earnings, Dargan said. 

Elizabeth Festa contributed to this article.