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Automobile industry

US Captive Finance Companies to Normalize in 2015: Fitch Ratings

Strategic Insights

— 1 min read

The US captive finance industry is poised to normalize in 2015, driven by higher competitive pressures, moderately eased underwriting standards, and increasing regulatory and compliance costs. Despite this, captive finance companies are expected to maintain solid performance, driven by diversified funding sources and less asset encumbrance relative to pre-2008 levels. Fitch Ratings' US captive finance peer group consists of 11 firms, including subsidiaries of major vehicle manufacturers such as Ford, GM, Toyota, Honda, Nissan, and Harley-Davidson.

Key Takeaways:

  • The average net loss rate for the peer group inched up to 0.65% in 2014 from 0.63% in 2013, but remains 13 bps below the five-year historical average of 0.78%.
  • Improved household net worth, job growth, low interest rates, and lower gas prices have underpinned robust credit quality for the group, with delinquency rates hovering near or just below their five-year average rates.
  • Pretax profit margins for the group remain solid, averaging almost 30% across the US group, with American Honda Finance Corporation and Toyota Motor Credit Corporation seeing increases in margin from 2013 levels.
  • Leverage, on a debt/equity basis, averaged 6.7x for the peer group at Dec. 31, 2014, which is higher relative to stand-alone finance companies.
  • The group saw average portfolio growth of 5.5% in 2014, slightly above 2013 levels when excluding the impact of GM Financial's acquisition of Ally's leasing international operations.
  • US new vehicle sales continued to increase in early 2015, hitting 17.1 million on a seasonally adjusted annual rate in March, a 6.5% increase from 15.5 million in 2013.

Statistics:

  • Net loss rate: 0.65% (2014), 0.63% (2013), 0.78% (five-year historical average)
  • Pretax profit margins: 29% (US group), 16.8% (GM Financial in 2014), 26.4% (GM Financial in 2013), 22% (Honda Finance), 31% (Toyota Credit)
  • Leverage: 6.7x (debt/equity) on Dec. 31, 2014
  • Portfolio growth: 5.5% (2014), 3.9% (2013)
  • US new vehicle sales: 17.1 million (seasonally adjusted annual rate in March 2015), 16.4 million (2014), 15.5 million (2013)

Sources:

  • Fitch Ratings, "U.S. Captive Finance Companies: 2014 Review -- Normalization in Profitability and Asset Quality Expected in 2015" (www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865486)
  • Fitch Ratings, "U.S. Captive Finance Companies" (www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865486)

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