Fitch: US Captive FinCo Performance Continues Normalizing

NEW YORK--()--Strong asset quality and profitability measures among many major US captive finance companies are expected to continue to slowly revert to more normal levels, driven by higher competitive pressures, moderately eased underwriting standards and higher regulatory and compliance costs, says Fitch Ratings.

Fitch's US captive finance peer group consists of 11 firms, including the subsidiaries of vehicle manufacturers Ford, GM, Toyota, Honda, Nissan and Harley Davison. The balance of the group includes Boeing Capital, Caterpillar Financial Services, IBM Global Financing, John Deere Capital Corp. and Navistar Financial Corp. Despite the expectation of continued performance normalization, we see captives likely maintaining solid performance overall, while continuing to benefit from diversified funding sources and less asset encumbrance relative to pre-2008. These factors, along with continued stable and/or improving financial conditions for parent companies supports the current ratings assigned to US captive fincos.

Average net loss rates for the peer group inched up slightly to 0.65% in 2014 from 0.63% in 2013. Despite the increase, net losses remain 13 bps below a more normalized (five-year historical average) level of 0.78%. Improved household net worth, job growth, low interest rates and lower gas prices, combined with high used car values, have underpinned robust credit quality for the group. As these conditions normalize, so too will captive asset quality, particularly for the auto lenders. Delinquency rates in 2014 hovered near or just below their five-year average rates, which we believe also supports a continuing trend toward credit quality normalizing in 2015.

Pretax profit margins for the group remain solid, averaging almost 30% across the US group, down from about 31% in 2013. GM Financial saw a meaningful decline in its profitability to 16.8% in 2014 from 26.4% in 2013, reflecting the asset-mix change to low-return, low-risk prime and commercial loans from high-return, high-risk subprime loans. Conversely, American Honda Finance Corporation's (Honda Finance) and Toyota Motor Credit Corporation's (Toyota Credit) pretax margins increased from 2013 levels, which was largely attributable to hedging gains from the US dollar strengthening against the euro and the yen. Across captive fincos, higher absolute leverage levels, relative to stand-alone finance companies, also continue to be a meaningful differentiator of financial performance. Leverage, on a debt/equity basis, averaged 6.7x for the peer group at Dec. 31, 2014.

Relatively stable economic conditions in the US have led to good auto sales and good portfolio growth among US captives. Average portfolio growth was 5.5% among the group of 11 in 2014. That growth was just slightly above 2013 when excluding the outsized impact of GM Financial, which acquired Ally's leasing international operations that year. US new vehicle sales continued to increase in early 2015, hitting 17.1 million on a seasonally adjusted annual rate in March. In 2014, 16.4 million units were sold, up 6.5% from 15.5 million units in 2013.

Although not yet returning to precrisis levels, Fitch has observed a modest increase in captive fincos' use of short-term funding over the last several years. Short-term debt accounted for no more than 20% total debt in 2014 for all captives, with the exception of Honda Finance and Toyota Credit, which had 22% and 31%, respectively, of total debt attributable to short-term debt in 2014. A higher dependency on the short-term markets raises the risk of a funding disruption under market stresses, with potential ratings implications for the parent and captive. Positively however, captive fincos maintain committed third-party liquidity support to reduce the impact of funding disruptions.

For a complete analysis of Fitch's US captive finance sector, please see "U.S. Captive Finance Companies: 2014 Review -- Normalization in Profitability and Asset Quality Expected in 2015," available at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: U.S. Captive Finance Companies: 2014 Review (Normalization in Profitability and Asset Quality Expected in 2015)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865486

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Contacts

Fitch Ratings
Nathan Flanders
Managing Director
Financial Institutions
+1 212 908-0827
or
Johann Juan
Director
Financial Institutions
+1 312 606-3339
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212 908-0652
33 Whitehall St.
New York, NY 10004
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Nathan Flanders
Managing Director
Financial Institutions
+1 212 908-0827
or
Johann Juan
Director
Financial Institutions
+1 312 606-3339
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212 908-0652
33 Whitehall St.
New York, NY 10004
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com