DBRS: GMF’s Solid 2Q14 Results Reflect Margin Improvement and Asset Growth on Record Volumes

Summary:
• GMF reported good QoQ growth in pre-tax income, primarily driven by improving net finance margin and well-controlled operating expenses.
• Record origination volumes on strong GM sales and improved penetration rates in U.S. leasing.
• DBRS rates General Motors Financial Company, Inc’s Issuer and Senior Unsecured Debt at BB (high) with a Stable trend.

DBRS, Inc. (DBRS) considers General Motor Financial Company, Inc.’s (GMF or the Company) solid 2Q14 results as demonstrating the continuing progress of the Company in developing a full product suite to support General Motors Company (GM). For 2Q14, GMF originated a record $5.2 billion of loans and leases. North American penetration rate of GM leasing improved substantially to 28.6% from 17.0% in the prior quarter. Meanwhile, GMF’s wholesale lending penetration rate expanded 410 bps quarter-on-quarter (QoQ) to 6.9%. From DBRS’s perspective, the improving penetration rates illustrate the benefits of GMF’s expanding suite of product offerings to GM dealers. With the introduction of a prime retail lending product in 2Q14, GMF has a full suite of products. While DBRS expects that prime lending volumes will grow modestly at first, ultimately, DBRS sees penetration rates improving across all products, especially in dealer floorplan lending.

For the quarter, GMF generated pre-tax income of $265 million, a 19% improvement from 1Q14. Growth in average earning assets and improving margins resulted in a 5% expansion in DBRS-calculated net financing revenue to $587 million. Loan yields were lower, reflecting the continuing shift in the portfolio mix to higher quality loans. However, higher leasing volumes and stable funding costs underpinned an 80 bps QoQ improvement in DBRS-calculated net finance margin to 6.5%.

Operating expenses were 4% higher QoQ at $280 million, reflecting continuing infrastructure investment and headcount increase to support the expansion of the leasing business and the anticipated launch of the retail prime lending product. As a percentage of average earning assets, operating efficiency was stable sequentially at 3.1%. DBRS expects over the medium-term that operating efficiency will improve as origination volumes in the new products grow and the platforms achieve the appropriate scale.

GMF’s balance sheet strength remains solid supported by good liquidity, an improving funding profile and sound capital levels. During 2Q14, GMF continued to diversify its funding sources, completing its first U.S. lease securitization, and issuing a CAD 400 million senior note. Subsequent to quarter end, GMF issued $1.5 billion of senior notes as well as priced a German retail loan securitization. As a result, pro-forma to the issuances after quarter end, 26% of total funding was comprised of unsecured debt compared to 14% at year-end 2012. Liquidity was solid with $4.8 billion available at quarter end comprised of cash, borrowing capacity on eligible assets and borrowing capacity on unsecured lines of credit.

Regarding capital, GMF’s tangible common equity-to-tangible assets (TCE ratio) ratio was a sound 13.2% at quarter-end, and still at the higher end of the peer group. Leverage (earning assets-to-tangible net worth) was 6.9x, near the mid-point of the Company’s target range of 6.0x – 8.0x.

DBRS rates GMF’s Issuer and Senior Unsecured Debt at BB (high) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.