43108405

North America Equity Research 16 March 2010

General Electric Co.

Overweight GE, GE US

Locked and Loaded: The Case for GE as a Momentum Play

Price: $17.29

Price Target: $22.00

Multi Industry & Electrical Equipment

C. Stephen Tusa, Jr CFAAC

(1-212) 622-6623 [email protected]

Phil Gresh, CFA (1-212) 622-4861 [email protected]

Drew Pierson (1-212) 622-6627 [email protected]

J.P. Morgan Securities Inc.

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Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Price Performance

YTD 1m 3m 12mAbs 14.3% 7.8% 9.8% 79.0%

General Electric Co. (GE;GE US) 2009A 2010E

(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

EPS - Recurring ($) Q1 (Mar) 0.26 0.15 Q2 (Jun) 0.26 Q3 (Sep) 0.22 Q4 (Dec) 0.28 FY 1.03 0.92 1.00 1.15 1.30 1.62Source: Company data, Reuters, J.P. Morgan estimates.

Company Data Price ($) 17.29Date Of Price 15 Mar 1052-week Range ($) 17.52 - 9.26Mkt Cap ($ mn) 183,533.35Fiscal Year End DecShares O/S (mn) 10,615Price Target ($) 22.00Price Target End Date 31 Dec 10

See page 23 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

We believe that, for the first time in over 10 years, the pieces are in place for earnings upside, a key to moving GE from value to momentum.

GECS not just a credit story . . . Investor focus remains on credit losses, an intuitive factor that moves with the economy. We believe losses are peaking and should begin to decline in mid 2010, and depending on the economy, we could see a rapid decline to normal levels in 2013, which would provide an estimated tailwind of $0.90 per GE share.

. . . as NIM locked and loaded, on the cusp of improvement in years ahead . . . Less obvious are the dynamics around portfolio margin, where GE benefits from cheap credit and limited competition. Guidance currently calls for a margin of ~5% in 2010, up only 40 bps. We see upside to this margin in 2011, and, by 2013 a potential ~$3B of tailwind.

. . . driving upside to GECS earnings. Putting it all together, we estimate GECS can do $2B in 2010 and $4B (more fully taxed) in 2011 versus 2010 guidance of ~$1.75B. The bottom line is that we still see normalized GE earnings of ~$2 in 2013, though the trajectory, especially at GE Capital, is likely to be more front end loaded, a positive.

Industrial: services backlog robust, especially at Aviation where macro environment is improving . . . The 10K showed a Tech Infrastructure services backlog scheduled for delivery stronger than expected at $11.9B vs. $9.2B estimated a year ago, mostly from Aviation, a positive. Peer comments support upside in the highly profitable aircraft services business (~15% EPS).

. . . while other businesses stable, and slowly turning. Energy, Healthcare, and even Transportation have moved from the deteriorating camp to "stable." We see all-in Industrial profit growth at a conservative 10% in 2011.

All in, upside vs. Street looks possible for first time in 10 years. We now see the potential for a beat in 2011. Our new 2010 number is $1.00 (Street $0.99), with 2011 moving to $1.30 (Street $1.20). Keep in mind that GE has missed sell-side FY2 expectations every year since 2000.

GE remains our top pick, momentum dynamics not discounted. GE is still considered a value play by most, and we agree at 13x 2011E EPS. However, we believe positive revisions would move GE decidedly into the momentum camp. Philosophically, we view positive earnings revisions as the ultimate catalyst for share price upside.

This document is being provided for the exclusive use of UNIVERSIDAD ESAN at UNIVERSIDAD ESAN

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C. Stephen Tusa, Jr CFA (1-212) 622-6623 [email protected]

Earnings Momentum Slowly Building We believe that the pieces are in place for earnings upside one year out, a key to moving GE from cheap with no catalyst into the momentum camp. The key here, as always, is GE Capital, at which we continue to see dramatic earnings tailwind from current levels to normalized on the back of lower losses and expanding margins, which offsets a decline in earning assets and a rising tax rate. We are also conservative on Industrial, though there are several data points that suggest we may be too conservative. Most notably, the pickup in air traffic and improving health in the airline industry, along with favorable timing around shop visits at GEAE suggest there could be some upside as soon as 2010. At 15-20% of GE Industrial profits, this business can move the needle. The bottom line is that we still see normalized GE earnings of ~$2 in 2013, though the trajectory, especially at GE Capital, is likely to be more front end loaded, a positive. Keep in mind that its been almost a decade since GE beat FY2 estimates as they stood at the beginning of FY1, and a beat of next years number would be the first time in CEO Immelt's tenure that we see an upward revision.

Table 1: Actual EPS Results vs. Initial FY2 Estimates for GE YOY Beg. Year Diff. Vs. Actual % Chg. FY2 Est Actual

2001 1.41 10% 1.42 -1% 2002 1.51 7% 1.74 -13% 2003 1.56 3% 1.83 -15% 2004 1.59 2% 1.77 -10% 2005 1.72 8% 1.78 -3% 2006 1.99 16% 2.04 -2% 2007 2.20 11% 2.26 -3% 2008 2.20 0% 2.49 -12% 2009 1.03 -53% 2.43 -58% 2010E initial 1.10 2010E standing 1.00 2011E 1.20 ??

Source: Bloomberg, J.P. Morgan estimates

Looking at the bridge for 2011 in more detail, Street estimates of $1.20 look attainable and probably too low on lower provisions/restructuring along with any reasonable pickup in Industrial. First, on non-fundamentals, we model restructuring returning to a normalized level, along with some carryover benefits from 2010 actions, a net $0.06 help. Industrial businesses should recover in 2011, as we assume 10% segment profit growth after a roughly flat 2010, adding $0.07. The rest of the tailwind comes from Capital Finance. This includes ~$3.5B ($0.33), partially offset by higher taxes, while other dynamics (including the expansion in NIM) help by $0.11.


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Table 2: GE Earnings Bridge $mm except per share data

09 Actual 10E JPM 11E JPM Notes Beginning EPS 1.79 1.03 1.00 Pension 0.00 (0.07) 0.00 Corporate, x-pension/rstrng (0.05) 0.04 0.00 Restructuring spend (0.01) 0.04 0.04 $500mm lower per year Restructuring saves 0.05 0.04 0.04 $500mm/yr carryover in Industrial Industrial Gains/Impairments 0.01 (0.01) 0.00 Interest 0.05 0.00 0.01 Tax Rate 0.00 (0.00) 0.00 Share Count (0.05) (0.00) 0.00 Base EPS 1.78 1.05 1.09 Industrial Price/Cost 0.09 0.02 0.00 Industrial Volume/Mix (0.24) (0.09) 0.05 GE Capital (0.60) 0.02 0.17 Provisions (0.32) 0.13 0.33 Tax 0.14 (0.13) (0.27) NIM & Other (0.42) 0.02 0.11 Final EPS 1.03 1.00 1.30 Prior Year Industrial Sales 113,357 104,304 102,850 + Acquisitions 0 0 0 + Currency 0 1,000 0 + Organic (9,053) (2,454) 5,995 = This Year Industrial Sales 104,304 102,850 108,845 Organic Growth -8% -2% 6% Implied $ Profit Incr/(Decr) (3,399) (1,307) 705 Implied Incr/Decr Margin 38% 53% 12%


So, after being below consensus for a long time, we are raising numbers, bumping 2010 in line with the Street, but establishing 2011 and 2012 numbers that are both ~$0.10 above the Street. While we acknowledge that $0.10 of upside is not that exciting at face value, we see a few levers including better industrial performance and a quicker ramp down in provisions that could drive further upside. In the end, however, as is most often the case with GE, the direction is just as important as the magnitude, especially in the context of the revision history for the last 10 years, which has set a low bar for expectations and most certainly impacted the valuation. This brings us to our next point on the stock.

Figure 1: We See Upside to Consensus in 2011 and Beyond EPS

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GE is still considered a value play by most, and we agree at 13x 2011E EPS. However, we believe positive revisions would move GE into the momentum camp. Philosophically, we view positive earnings revisions as the ultimate catalyst for share price upside, and we remain OW on this basis. Our $22 Dec 2010 price target is based on 12x our normalized (2013E) EPS of $1.80, an in-line multiple with the group target. This is reinforced by a sum of the parts analysis on 2011E which has the Industrial business at 18x, a 20% premium to our group average EPS, and a recovery to just 0.7x book value for GECS. In the analysis below, we start with GECS, which remains the most important lever in the story.

Table 3: Valuation Continues to Look Favorable FY11E EPS Multiple Per Share

Industrial EPS 0.95 18.0 17.05 BV/share Multiple Per Share

GECS Implied 6.60 0.0 0.24 Current Stock Price 17.29

FY11E EPS Multiple Per Share Industrial EPS 0.95 18.0 17.05 BV/share Multiple Per Share GECS 6.60 0.7 4.95 Price Target 22.00


GECS: Ramp to Normalized Could Be More Front End Loaded GECS has seen the greatest level of earnings impairment, a headwind to GE EPS of $0.50+ from peak to trough, and the prevailing view is that (1) losses will remain stubbornly high, while (2) a decline in the asset base will make earnings growth a challenge. We disagree on both fronts and continue to see a pathway to significantly higher normalized earnings, through a combination of lower losses and better margin, despite a lower asset base. With better data points on credit performance as well as portfolio margin, we are growing more confident in the outlook but believe the ramp could be more front end loaded than we initially assumed, a positive and key to the 2011 earnings momentum story. The bridge below shows the building blocks of how we get to our 2011 number from the 2009 base.

Table 4: GECS Earnings Bridge $mm except margin data

2009 2010E 2011E Portfolio CV 32,748 32,218 32,945 Portfolio Margin 6.3% 6.8% 7.4% Provisions (10,928) (9,517) (5,977) Other expenses/gains/impairments (24,028) (23,185) (22,818) GECS Pretax income (2,208) (484) 4,151 Taxes 3,829 2,484 (415) Net income 1,621 2,000 3,736

Source: Company reports, J.P. Morgan estimates


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Charge-Offs Likely Putting in a Peak, and Provisioning Still a Major Earnings Lever Credit improvement and a related ramp down in provisions is a more visible tailwind going into 2011, but we continue to believe theres room for surprise just how quickly provisions could ramp down from the peak. Macro indicators, industry data, and comments from financial peers all suggest that charge-offs are at or near peak, something that should become clear at GE as soon as the 1Q earnings call. GEs charge-offs (the actual loss experiences in the portfolio) have remained flat for two consecutive quarters, and while guidance remains for provisions/impairments to be flat in 2010, management has already given indications that next year could be better. This includes (1) commentary in the 4Q earnings slides that capital finance is positioned for upside in 2010, and (2) CEO Immelts annual shareholders letter published last week, in which GE believes that non-earning assets have peaked, furthering the view that provisions should drop on a dollar basis in 2010. The bottom line is that the peak in losses looks to be coming sooner than many may have expected, and a lower loss base for 2010 could carry through to earnings upside in 2011. Keep in mind that the mix of the portfolio in the out years will be more heavily weighted toward lower loss commercial businesses, another reason why assuming the previous normal may be too pessimistic and making our out-year model look more conservative.

Macro data turning, while charge-offs look to be bottoming as we speak We have always believed that a trough in macro trends portends a peak in charge-offs, something that we believe is playing out now. As an illustration, we plot industrial production growth versus charge-offs for all consumer & commercial loans at FRB chartered banks what is notable is that in the last two recessions, the peak in charge offs came within a few quarters of the IP trough (which came in mid 2009). While 4Q charge offs for total loans and leases ticked up slightly in 4Q (mostly real estate driven), that may well prove to be the peak given historical relationships and the rapid improvement elsewhere in the economy.

Figure 2: Industrial Production Recovery Has Historically Led Improvement in Bank Charge-Offs Industrial Production (Y/Y) FRB Total Loans & Leases (1 % Charge Off Rate)

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Source: FRB, J.P Morgan estimates.

Notably, according to FRB data, charge-offs in many verticals like C&I loans and consumer installment credit appear to have already peaked in 3Q. This is not surprising in the context of lending standards, which are now actually loosening for both commercial and consumer loans, typically a bullish sign for credit. Historically


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charge-offs have peaked 12-18 months after a peak in lending tightening, which came in 3Q/4Q of 2008.

Figure 3: C&I Charge Offs Have Peaked, Lending Standards Are Now Being Eased . . . Net % Tightening, C&I lending standards C&I Loans Annual Charge-Off Rate

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Figure 4: . . . And Consumer Lending Shows the Same Dynamics Consumer Installment Lending Standards (% tightening) Consumer % Charge-Off Rate

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Fed charge-off data for total loans and leases has historically been a good indicator for GE, per the chart below, given the mix of commercial and consumer assets. In fact, while GE charge-offs have generally moved directionally with the macro data, the peak in losses has been less severe than we had originally thought based on historical relationships. It is interesting to point out that we had previously modeled GECS charge-offs to peak at close to 3%, which now appears to be too conservative.


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Figure 5: GECS Charge-Offs Leveling off with Macro Data . . . GE Charge Offs as % of Avg Receivables FRB Annualized Charge Offs - Total Loans & Leases

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Figure 6: . . . And Significantly Lower Than Our Previous Expectations GECS Charge Offs, % of Rec FRB Annualized Charge Off Rate, Total Loans & Leases

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Comments from Delinquency Data Stabilizing Across Most Verticals Drilling a level deeper beyond just the macro data, a look at more recent releases from major banks and other financial players further illustrates the signs of improvement. What is clear based on comments from a recent financials conference is that charge off-trends continue to improve, in some cases ahead of previous guidance. Most of these companies believe that charge-offs either peaked in 4Q or that they will do so in 1Q.

Table 5: Financials - Summary of Credit Commentary from Recent Conference Company Date Highlights of remarks STI 3/10 Expects 1Q charge-offs flat w/ 4Q versus previous guidance of a q/q increase RF 3/10 Credit cycle moderating, NPA formation slowing with encouraging signs on credit front ZION 3/10 Says NCOs flat to slightly lower in 1Q (in line w/ previous guide) USB 3/10 Charge-offs will increase q/q but near an inflection (in line w/ previous comments) FITB 3/11 Charge-offs to fall few hundred million q/q in 1Q SNV 3/11 1Q credit metrics to remain similar to 4Q; 2Q to improve; 2010 provisions and NPAs to decline COF 3/11 Domestic charge-offs to peak in 1Q

Source: Company reports


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Looking at industry data from a few different verticals, starting with equipment monthly data from ELFA, shows that delinquencies and charge-offs look to have peaked in 3Q09. This is a significant read through for GE, which has ~$60B of exposure here. Similar to macro data around lending standards, credit approval ratios bottomed in 2Q09 and have since risen, a positive leading indicator. This all supports recent data from GE, which saw delinquencies improve in 4Q.

Figure 7: ELFA 30+ Day Delinquencies

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Figure 8: ELFA Charge-Offs

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Figure 9: ELFA Credit Approval Ratios

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Figure 10: GE Equipment Financing Managed Delinquency

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Elsewhere, for C&I loans more broadly, the theme across much of 4Q earnings season were modest increases in NPLs and charge offs, but at a slower rate of growth. In fact, while FDIC-member banks saw another move up in charge-offs (2.67% in 4Q versus 2.64% in 3Q, 2.43% in 2Q), non-earners actually moved sequentially lower (3.44% versus 3.57% in 3Q). FRB data suggests that charge-offs peaked in 3Q, while commentary from several banks, including USB, suggests that a charge-off peak comes in 1H. Bottom line, we would expect C&I losses to lag given that they are generally later cycle, but a peak looks to be within sight.


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Figure 11: C&I Loans Delinquencies/Non-Earners

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Figure 12: C&I Loan Charge-Offs

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On GEs global mortgage exposure, new disclosure beginning in 2009 makes it possible to follow the various regions more closely. The risk from a loss perspective is the subprime exposure in the UK ($21B of the $59B in total mortgages). Recent data shows that delinquencies and non-earners have leveled off since 2Q/3Q, supporting GE's view that loss provisions could be lower here than in 2009.

Figure 13: GE Mortgage 30+ Day Delinquencies

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Figure 14: GE Mortgage Non-Earners

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Finally, the Commercial Real Estate book remains a challenge, though we dont believe this to be news at this stage in the cycle. We expect this to worsen in the coming quarters, but at only 13% of the receivables base it is not enough to outweigh improving trends across other areas in the portfolio. We model an increase of RE provisions to $1.65B in 2010 and $2.35B in 2011 from $1.44B in 2009.


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Figure 15: FDIC Member Commercial Real Estate Loan Performance % Non Earners % Charge Offs

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Figure 16: GE Real Estate Charge-Off Rate (Annualized)

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Longer Term, Mix of Business Should Be Beneficial to Loss Levels If we assume that credit troughs near term, then we need to begin to dial in expectations for the out years. Our previous estimate is for provisions to move from the standing 2009 peak of $10.9 B to ~$3B, which is the same level the company saw in 2005 on a similar base of receivables ($290B). It is notable, however, that the mix of the assets this time around should be much more favorable, with 65% in more secure, commercial business versus the previous level of 55%. The table below illustrates these dynamics and how the different mix can be more positive. We have lowered our estimate from $3B to $1.5B to better reflect this dynamic.

Figure 17: Mix Should Lean More Towards Commercial

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Figure 18: Which Represents a Minority of 2009 Provisions, in Line with Historical Patterns

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We continue to assume structurally higher reserves, while charge-offs could still prove better than our model, meaning a quicker ramp down in provisions The bottom line on credit is that even assuming a modest increase in charge-offs in 2010 (far from a given as charge-offs may have already peaked), we believe provisions can ramp down dramatically and still get to structurally higher loan loss reserves. Our model shows the ending reserve build reaching ~3.9% by the end of 2012, or almost twice the companys historical average reserve of 2.25%.

Table 6: We See Provisions Dropping While Reserves Build $ in millions

2009E 2010E 2011E 2012E Beginning Reserve 5,325 8,105 9,796 10,582 Provisions 10,928 9,517 5,977 3,730 Net Charge offs 8,148 7,576 5,190 3,077 Ending Reserve 8,105 9,796 10,582 11,235

% of Receivables Beginning Reserve 1.41% 2.35% 3.03% 3.45% Provisions 3.02% 2.85% 1.90% 1.25% Charge Offs 2.03% 2.27% 1.65% 1.03% Ending Reserve 2.35% 3.03% 3.45% 3.87% Source: J.P. Morgan estimates.

Net Interest Margin, a Key Driver GEs NIM has been near historic lows in 1H09, driven down by the pre-funding of 2010 liabilities, sluggish commercial loan demand, the reduction in commercial paper (a negative for mix of interest expense), as well as the low yielding business put on at the peak of the most recent credit boom. We expect this to normalize over the next two years as pre-funded debt works its way into interest-bearing assets and better pricing on recent deals begins to flow through. All in, we see ~190bps of cumulative improvement in NIM from 2009 levels, the bulk of which should come in 2010 (+60bps y/y) and 2011 (+50bps y/y). Below we show net interest margin historically, which fell throughout the last cycle. As background, the definition includes revenues from operating leases as well as PP&E (mostly leased equipment), minus interest expense and D&A.


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Figure 19: GECS Net Interest Margin Including Operating Leases

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At a high level, the theme here is that GECS is well positioned to take advantage of its currently low cost of capital and provide scarce but needed capital to the middle market customers and consumers. In essence, this is an arb between those two markets and the spread is quite wide. The charts below show GE's debt spreads next to the NFIB survey of small business, showing that GE's cost of capital continues to improve, while availability from competitors remains scarce, a positive for near-term pricing.

Figure 20: GE Borrowing Spreads Back to Pre-Crisis Levels . . . GE 10 year debt, spread to Treasuries

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Source: J.P. Morgan

Figure 21: . . . While Small Business Credit Availability Still Tight NFIB Availability of Loans Index

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A Deep Dive into Capital Finance portfolio margin We take the analysis a step further below, using information provided by GE around the mix of collections/originations and related returns to model the progression of higher yielding rolling on to the book. We somewhat reluctantly use the GE definition of portfolio margin or "contributed value" as the driver, given that is the information that the company has provided. We start by describing the definition and how that differs from the NIM reported in the GECS filings. We then model out our view around collections and originations to illustrate the positive mix impact. This is key to our model as it adds an incremental ~$2B versus the 2009 base.

As background, GE has recently begun disclosing data around portfolio margin, a concept similar to the above definition of NIM, though the complexities of GEs


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calculations make it somewhat difficult to interpret at face value. In the numerator is contributed value (CV), which is total revenues less interest expense (both on a Capital Finance basis, from the GE 10Ks). This is divided into what GE calls average net investment (ANI), or a trailing 5-quarter average of capital finance ending net investment. Curiously, ANI cannot be calculated directly from the financial statements, though we can back into the historical ANI numbers using the margins and revenue data provided.

Table 7: GE Capital Portfolio Margin Calculation Capital Finance Revenues From GE 10K Segment Data Less Capital Finance Interest From GE 10K Segment Data Contributed value Divided by ANI 5-quarter avg of assets less non-interest bearing liabilities Portfolio Margin

Source: Company Reports, J.P. Morgan

GE then adjusts the reported portfolio margin in a couple of ways. First, they subtract out D&A, COGS, and maintenance expense (a small number for GE Capital) as well as net gains and impairments. Second, they remove the impact of what the company calls restructuring assets, a portfolio of businesses that GE looks to wind down over time. This was ~$50B at the end of 2009, with the largest components being UK mortgage (~$21B), certain equipment leasing platforms (~$15B), as well as various other consumer assets. The company believes these assets to have limited impact on margins in 2009 and 2010, meaning they yield near the company average. Adjusting for these items, we get a closer representation to the core margin for the ongoing businesses. Charts from the December analyst day show that GE expects this core margin to increase ~40bps in 2010 (we detail our own forecast in the next section).

Table 8: Company Data & Guidance - Capital Finance Portfolio Margin 2006 2007 2008 2009E 2010E

Capital Finance Portfolio Margins 9.8% 9.0% 7.5% ~6.3% ~6.5% Less Margin Impact of "Restructuring" Assets (1.4%) (1.0%) (0.7%) ~(0.1%) ~0.0% Less D&A, COGS, Net gains/maintenance (2.7%) (2.6%) (2.0%) (1.6%) (1.4%) Adjusted Capital Finance Portfolio Margins 5.7% 5.4% 4.8% 4.6% 5.0%


Finally, we relate portfolio margin to GECS earnings, which is obviously important in terms of extracting meaning from the numbers provided. Essentially, the reported portfolio margin gives Capital Finance CV (revenues less interest), from which you then subtract all the other GECS expense accounts. The final adjustments are to include the incremental revenue and interest included in GECS but not in the Capital Finance reporting (mostly the insurance run-off and other corporate items). We reconcile the 2008 figures below as an illustration. With this background, the following section walks through our analysis and earnings estimate using margin data provided by GE.


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Table 9: Walk: Capital Finance Portfolio Margin to GECS Net Income $mm except margin data

2008 Notes Capital Finance Revenues 67,008 From GE 10-K, segment data Capital Finance Interest 25,094 From GE 10-K, segment data Portfolio Margin 7.5% From Company presentations ANI (5-point avg, implied) 558,853 Reported CV 41,914 GECS D&A (9,330) From GECS 10-K GECS Op & Admin (18,755) From GECS 10-K GECS COGS (1,517) From GECS 10-K GECS Investment contracts, insurance (3,421) From GECS 10-K GECS Minority Interest (231) From GECS 10-K GECS incremental revenues 4,279 Difference between Cap Finance and GECS revenues GECS incremental interest expense (22) Difference between Cap Finance and GECS interest expense GECS Pretax, Pre Provision Profit (PTPP) 12,917 GECS Provisions for losses (7,518) GECS Pretax Income 5,399

Source: Company Reports, J.P. Morgan

Our Crack at Measuring the Impact of Better Loan Pricing The key dynamic behind the next several years at GE Capital will be the roll-off of older, lower margin assets, replaced by business that is currently being written at a much higher margin. Data from the December investor day illustrates this, using the adjusted margin definition described above.

Figure 22: Commercial Margins: New vs. Run Off 2009E, adjusted portfolio margins

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Figure 23: Commercial Margins: New vs. Run Off 2009E, adjusted portfolio margins

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Below, we use information on collections and originations provided in recent GE presentations to put together a picture of how the portfolio compositions and returns may evolve over the next several years. For example, as of midyear the company had targeted $41B of 2009 commercial originations and $112B of consumer originations, numbers we use to guide our estimates. We center our analysis on the core (ex-restructuring) portfolio as we expect GE to wind down most of the ~$50B restructuring assets between now and 2013 through a combination of collections or asset sales. We model the company moving to ~$400mm in capital finance ENI by the end of 2012, in line with guidance. As for new volumes, we see steady issuances in consumer but a pickup in commercial originations (where volumes were depressed in 2009), moving back to the historical 4-5 year turnover rate for the commercial book.


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Table 10: JPM Originations/Collections Forecast $mm except where noted

2009 2010E 2011E 2012E 2013E GECS total assets 650,241 600,885 555,341 512,841 502,841 Discontinued assets 1,595 1,595 1,595 1,595 1,595 Non interest bearing liabilities 75,700 70,700 60,700 60,700 50,700 GECS ENI 572,946 528,590 493,046 450,546 450,546 GECS HQ ENI 79,400 67,544 59,500 44,500 44,500 Cap Fin ENI 493,546 461,046 433,546 406,046 406,046 Restructuring Assets (Global Mortgage/Equip) 50,000 45,000 35,000 20,000 0 ENI 443,546 416,046 398,546 386,046 406,046 ANI (average) 456,874 429,796 407,296 392,296 396,046 ENI 443,546 416,046 398,546 386,046 406,046 Commercial 330,500 310,000 295,000 285,000 300,000 Consumer 113,046 106,046 103,546 101,046 106,046 Restructuring 50,000 45,000 35,000 20,000 0 Collections 175,656 205,400 201,640 200,072 171,176 Commercial 63,085 82,900 83,640 82,072 60,676 Consumer 112,571 122,500 118,000 118,000 110,500 Restructuring 5,000 5,000 10,000 15,000 20,000 Collections Growth 17% -2% -1% -14% Commercial 31% 1% -2% -26% Consumer 9% -4% 0% -6% New Volume 149,000 177,900 184,140 187,572 191,176 Commercial 39,000 62,400 68,640 72,072 75,676 Consumer 110,000 115,500 115,500 115,500 115,500 Volume Growth 19% 4% 2% 2% Commercial 60% 10% 5% 5% Consumer 5% 0% 0% 0% Implied turnover rate (years) 5.1 4.4 4.0 3.9 Source: J.P. Morgan estimates

With estimates around the total originations and collections, we then provide a detailed walk showing how the new, higher margin assets roll onto the book. Starting with commercial, we assume that margins on new business compress gradually over time as competition returns but continues to come on at a higher margin than existing loans on the book, giving ~30-40bps of margin accretion per year over the next several years. For consumer, we divide the book into two parts, a quick turn portion consisting of installment and revolving credit, and a slow turn portion consisting of all other auto loans, mortgages, and related products. The dynamics here are near-term lift from the shorter cycle cards business, where pricing has been more favorable and the book turns quickly, while the other assets roll off more slowly over time. In consumer also we assume modest degradation over the course of the cycle as competition returns, but we see margins staying above the run-off volume in 2009.The bottom line is that we get modestly above the ~5% margin guidance for 2010, with further improvement each of the next several years. All in, the improvements in margin more than offset asset declines in the core portfolio, a net positive for absolute CV. In total, we see a tailwind for CV of ~$3 B over the next several years, front end loaded in 2010 and 2011.


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Table 11: GECS CV Build (Ex-Restructuring Assets) $mm except margin data

2009 2010E 2011E 2012E 2013E Consolidated ENI End 443,546 416,046 398,546 386,046 406,046 CV 21,016 21,824 22,010 22,447 23,729 Total CV Margin 4.6% 5.1% 5.4% 5.7% 6.0% Commercial ENI End 330,500 310,000 295,000 285,000 300,000 CV 10,276 10,514 11,081 11,810 13,052 Total CV Margin 3.0% 3.3% 3.7% 4.1% 4.5%

CLL Americas ENI End 105,760 116,383 117,997 121,704 134,521

CV 4,023 4,622 5,753 5,811 6,384 Total CV Margin 3.5% 4.2% 4.9% 4.8% 5.0%

Other Comm'l ENI End 224,740 193,618 177,004 163,296 165,479


Consumer - total ENI End 113,046 106,046 103,546 101,046 106,046 CV 10,740 11,311 10,929 10,637 10,677 Total CV Margin 9.4% 10.3% 10.4% 10.4% 10.3%

Consumer - slow turn ENI End 51,840 48,579 46,249 47,472 45,459


Consumer - quick turn ENI End 61,206 57,467 57,297 53,574 60,587


Source: J.P. Morgan estimates

Bottom Line: GECS Net Income of ~$4 B Likely in 2011 Finally we take these core (adjusted) margin estimates to bridge to GECS net income. To get back to reported CV, we add back the CV from restructuring assets (assumed at 5% margin) and total D&A/maintenance/net gains (guided to 1.4% for 2010, and we assume modest improvement for 2011). Securitization gains will go away following the FAS 167 accounting change, offset by the $1.3B of new earnings from assets brought on book, all in line with company guidance. The major lever beyond this is provisions, which we believe fall modestly in 2010 with a bigger ramp down in 2011. We apply a 10% tax rate to reach our 2010 net income number of ~$4B. It is also important to note that this is a clean earnings number, not assuming any meaningful gains in areas like Real Estate.


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Table 12: Portfolio Margin to GECS Earnings Walk $mm

2009 2010E 2011E Adjusted Portfolio Margin 21,016 21,824 22,010 D&A/Gains/Maintenance 8,317 6,682 7,604 D&A/Gains/Maintenance % of ANI 1.6% 1.4% 1.7% Bringing Securitization assets on book 1,300 1,300 Restructuring ops CV 3,415 2,412 2,031 ANI (5-point avg, implied) 519,810 477,296 447,296 Reported CV 32,748 32,218 32,945 GECS D&A (8,325) (7,547) (6,974) GECS O&A (15,175) (14,872) (14,872) GECS COGS (799) (825) (866) GECS Investment contracts, insurance (3,193) (3,033) (2,882) GECS Minority Interest 0 0 0 GECS incremental revenues 3,511 3,160 2,844 GECS incremental interest expense (68) (68) (68) GECS Pretax, Pre Provision Profit (PTPP) 8,699 9,034 10,128 GECS Provisions for losses (10,928) (9,517) (5,977) GECS Pretax Income (2,208) (484) 4,151 Taxes 3,829 2,484 (415) GECS Net income 1,621 2,000 3,736 Source: Company data, J.P. Morgan estimates

GE Industrial: Steady State with Economy, Upside Potential at Aviation Outside GECS, our forecast for Industrial remains conservative, showing only 4% revenue and 7% profit CAGR in the years ahead. The performance through the downturn has surprised us if guidance/JPM estimates of flat industrial profits holds for 2010, this would be a peak to trough EPS decline of only 18% versus the group average of 30%, close to best in class. There is not too much new news on the Industrial businesses, though, slowly, things look like they are turning. Indeed, thinking back to this fall, there was really nothing in the GE Industrial portfolio that was moving in a positive direction. Energy Infrastructure orders were still getting worse, along with Healthcare, which had its worst order quarter of a brutal cycle, while Transportation continued to fall off a cliff. Lastly, Aviation aftermarket was also getting worse, with OE production cuts looming. Slowly, some things have changed. Oil and Gas and Healthcare had solid 4Q orders, and while Energy trends have not changed much, GE Aviation looks to be at an inflection with related macro data, positive new news.


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Table 13: After Challenging Mid 2009, Industrial Trends Improving GE Business 2Q/3Q09 Trends Today Energy Major equipment orders down 62%/50% in

2Q/3Q respectively 4Q equipment orders down 22%, almost twice 2Q levels; margins top 20% on favorable mix/services margin performance

Oil & Gas Major equipment orders -7% in 2Q Equipment and services orders both up 30% in 4Q

Aviation Flight hours continue to slow, average daily order rates for spares hits trough of $18.6mm in 3Q (down ~20% y/y)

Flight hours improving, daily spares order rate improves to $19.6mm in 2Q, Airbus announces narrowbody production increase

Healthcare Equipment orders down 13%/15% in 2Q/3Q respectively; service orders and revenues decline y/y

4Q equipment orders up 13% y/y and 40% sequentially; services orders +6% y/y

Transportation 2Q equipment orders down 71% y/y 4Q equipment orders down 40% Source: Company reports, J.P. Morgan

GE Aviation Upside Could Be Enough to Move the Needle Recent news flow suggests that the biggest upside opportunity near term may come in Aviation. First, on the OE side there is the well publicized narrow body production increase at Airbus and news that Boeing may consider similar moves midyear for the 777 and 737. While it is too early to call whether this is the bottom in the OE cycle, this is a clear positive relative to expectations just months ago that a narrow body production cut was likely. The real opportunity for upside comes on the services side, however, which we estimate carries ~30% margins and represents 15-20% of total Industrial profits, big enough to move the needle. A couple of data points stand out here. First, the 10K showed a Tech Infrastructure services backlog for next years delivery stronger than expected at $11.9B, which compares to $9.2B estimated a year ago. We think this is driven in part by Aviation, where GEs installed base remains in a favorable portion of the cycle with respect to highly profitable engine overhauls. Note that 40% of GE engines have yet to go through their first shop visit, while 60% have yet to see their second visit.

Figure 24: Aviation Installed Base in Sweet Spot for High Margin Overhauls . . .

40%

60%

Engines Yet to Hav e 1st Shop Visit Engines Yet to Hav e 2nd Shop Visit


Figure 25: . . . Which We See in Strong Expected Services Backlog Deliveries for 2010 Technology Infrastructure service backlog expected for forward year delivery

9.2

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02468

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2009E 2010E


As for spares orders, driven more by utilization and flight hours, flight hours comps are improving as airlines lap last years declines. While aftermarket peers have not yet seen a turn in the orders, deferral/de-stocking activity is stable, and most expect significant improvement in 2H as airline purchasing activity realigns with flight


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hours. For example, UTX sees 6-7% growth in spares for 2010 (including price gains), while COL expects its aftermarket businesses to be up 6% (-5% 1H, up mid-teens 2H of September-end FY). GE daily order rates for spares declined through the first three quarters of 2009 ($21.6mm 1Q, $20.4mm 2Q, $18.6mm 3Q), bouncing back to $19.6mm, still an 11% y/y decline. If the improvement forecast by peers materializes in the 2H, this would be an additional upside lever for services; overall, with a favorable backlog and improving trends seen at peers, there are reasons to believe that performance could ultimately be better than the mid-SD increase we forecast in our model.

Valuation: If They Can Beat, Multiple Should Expand Moving to valuation, GE looks cheap at face value at ~13x 2011E EPS versus the group at ~16x, and even cheaper at 9.5x normalized earnings. The pushback is that with 30% of 2011E earnings in GECS and structural growth pressures there, the valuation deserves a discount, with the most bearish view at 1x tangible book of $38B or $3.50 per share. We note that currently there is a range around financials, with the best franchises trading at 3-5x tangible book, or ~2x book, and the weakest trading at just under 1x tangible book, or ~0.5x book. The table below shows who these players are and at what levels they trade.

Table 14: Financials Valuations Price/Book Price/Tangible Book

AXP 3.37 BK 5.06 USB 2.03 AXP 4.27 SBNY 1.95 USB 3.59 VLY 1.86 PNC 2.92 TCB 1.72 MTB 2.87 SIVB 1.69 STT 2.71 CYN 1.55 VLY 2.50 STT 1.52 BBT 2.40 WFC 1.50 CYN 2.19 TRMK 1.40 TCB 1.98 MTB 1.35 WFC 1.97 FHN 1.35 SBNY 1.95 BBT 1.31 TRMK 1.95 BXS 1.28 Average 1.94 BK 1.25 SIVB 1.69 Average 1.24 BXS 1.66 PNC 1.21 FITB 1.60 CMA 1.15 UMPQ 1.56 FITB 1.08 BAC 1.52 PVTB 1.03 COF 1.51 PBCT 1.02 FHN 1.48 WTNY 0.92 PBCT 1.45 WBS 0.88 WBS 1.42 UMPQ 0.83 STI 1.41 STI 0.76 WTNY 1.37 ZION 0.76 CMA 1.19 BAC 0.75 PVTB 1.16 C 0.73 SUSQ 1.16 COF 0.68 RF 1.05 RF 0.60 ZION 1.04 MI 0.60 C 0.94 SUSQ 0.43 MI 0.68

Source: Bloomberg


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We are of the view that, in the worst of times, many financials can be looked at as insolvent using market prices to mark down their books, while in a more normal environment, the goodwill has some value. As per history, the trading range for a broad peer group has typically been north of 1x book. Our call on GE is that, as earnings move up, and comfort around the cycle matures, the valuation range on GECS can move back toward 1x book. Indeed, throughout the last 20 years, using a 20% premium on the EE/MI average for Industrial earnings, the implied multiple for GECS was well above 1x and would move cylically with earnings (shown below through ROA). We see a similar scenario this cycle where, once investors get visibility on a turn in profitability, the multiple can expand off depressed levels. Keep in mind, we are not saying that GECS should trade at the high multiple of its past but rather that it should move closer to book value over time and move directionally higher off its current levels.

Figure 26: GECS Historical Implied Price/Book Implied Value, assumes 20% premium to EE/MI peers on FY1 Industrial EPS GECS Book Value GECS ROA

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Figure 27: Financials Have Historically Averaged >1x BV Group includes C, WFC, BAC, USB, PNC, BBT, RF, STI, FITB, AXP, COF

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Looking at the implications for FY11 EPS in more detail, the EE/MI group currently trades at ~15 consensus 2011 estimates. Using our estimated $0.93 of Industrial EPS in 2011, valued at a 20% premium to industrial peers, the current stock price appears to imply almost no value for GE Capital. Our Dec 2010 $22 price target implies that


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this moves to ~0.8x BV, which would still be among the lowest in the still below average financials space and below the ~1.25x average multiple.

Table 15: Current Valuation Implies Little Value for GE, While a Reversion Could Drive Upside FY11 EPS Multiple Per Share

Industrial EPS 0.95 18.0 17.05 BV/share Multiple Per Share

GECS Implied 6.60 0.0 0.24 Current Stock Price 17.29

FY11 EPS Multiple Per Share Industrial EPS 0.95 18.0 17.29 BV/share Multiple Per Share GECS 6.60 0.7 4.71 Price Target 22.00

FY11 EPS Multiple Per Share Source: Bloomberg, J.P. Morgan estimates

As a check, we also look at a simplified sum of the parts where investors could get exposure to a high-quality industrial peer (EMR) and a large-cap bank trading below 1x tangible book (BAC), a trade that we hear a lot about in our travels. Using current multiples for both, it implies this is an unfavorable way for a price-sensitive investor to create a synthetic GE." Applying these multiples to the constituent parts of GE suggests investors are paying a 7% premium to re-create GE.

Table 16: Using a EMR/BAC Composite, GE Shares Still Look Attractive FY11 EPS EMR

Multiple Per Share

Industrial EPS 0.93 16.6 15.49

Tangible BV Per Share

BAC Multiple

Per Share

GECS 3.68 0.75 2.76 Implied Stock Value 18.25 Current Stock Price 17.29 Premium/Discount -7%


Valuation & Risks We remain Overweight GE shares trade at ~9.5x our normalized 2013 EPS estimate of $1.80, a ~25% discount to EE/MI peers. While GE has traditionally traded at a premium to the group, we think a parity multiple is more appropriate going forward given a less levered GECS but best-in-class assets in the infrastructure segments. Our $22 Dec 2010 price target is based on 12x normalized (2013) earnings, or a 16x mid-cycle multiple discounted back at a 10% rate, which is in line with our target for the group.

Risk to our rating Downside risks at GECS include (1) the failure to realize tax synergies with the industrial parent; (2) tail risk around regulatory action that forces a sale of distressed Real Estate assets; (3) higher than expected losses or impairments from real estate; and (4) further pressure on the global financial system that hurts asset values or limits GECS access to the wholesale funding markets. Downside risks at Industrial include


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(1) Prolonged weakness in global power markets that hurts energy orders; (2) weaker than expected commercial air traffic that hurts Aviation services; (3) US healthcare legislation causes another leg down in hospital capital equipment spending; or (4) continued weakness in film and advertising markets


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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

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General Electric Co. (GE) Price Chart

N $8 OW $17

N $9 OW $14OW $22

N N $13 N $12 OW $17OW $20

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

16-Jun-08 N 29.15 -- 09-Dec-08 N 18.88 13.00 06-Feb-09 N 10.85 9.00 10-Mar-09 N 7.41 8.00 12-May-09 N 14.19 12.00 08-Sep-09 OW 13.87 17.00 19-Oct-09 OW 16.08 14.00 19-Oct-09 OW 16.08 17.00 16-Dec-09 OW 15.75 20.00 07-Jan-10 OW 15.45 22.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research


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analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: C. Stephen Tusa, Jr CFA: 3M (MMM), Danaher (DHR), Dover (DOV), Emerson Electric Co. (EMR), General Electric Co. (GE), Honeywell (HON), Hubbell Inc. (HUBB), ITT Corp. (ITT), Ingersoll Rand (IR), Lennox International (LII), Rockwell Automation (ROK), Roper Industries (ROP), SPX Corp. (SPW), Textron (TXT), Tyco International (TYC), WABCO (WBC), Watsco (WSO), Watts Water Technologies (WTS), Wesco (WCC)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2009

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 42% 44% 14% IB clients* 58% 57% 42% JPMSI Equity Research Coverage 41% 49% 10% IB clients* 78% 73% 57%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

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Legal Entities Disclosures U.S.: JPMSI is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission.


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Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 020/01/2010 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic


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updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

Other Disclosures last revised March 1, 2010.

Copyright 2010 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.


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