DBRS: GMF 3Q14 Results Lower QoQ Due to Shift in Asset Mix and Higher Provisioning on Asset Growth

Summary:
• GMF reported 3Q14 pre-tax income of $208 million, a 21% reduction from $265 million in 2Q14.
• Lower 3Q14 earnings, QoQ, reflect stable net finance revenue generation offset by higher provisioning expense and operating expenses.
• DBRS rates General Motors Financial Company, Inc.’s Issuer and Senior Unsecured Debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) considers General Motor Financial Company, Inc.’s (GMF or the Company) 3Q14 results as reflecting the Company’s evolving franchise and funding strategy. Although earning assets grew 3% quarter-on-quarter (QoQ), GMF’s DBRS-calculated net finance revenue totaled $584 million in the quarter, essentially flat on a linked-quarter basis. The continuing shift in the mix of earning assets to higher quality loans and leases, which yield less than the legacy AmeriCredit loans, and higher funding costs, as GMF continues to issue unsecured debt to broaden its funding profile, were the primary drivers of the flat revenue performance. At quarter-end, 32% of GMF’s funding was unsecured compared to 22% a year ago. Overall, while GMF’s shift to full captive finance capabilities and focus on unsecured funding have impacted near-term financial results, DBRS views these initiatives as credit positives and supportive of the rating. The focus on higher quality lending in support of GM will improve revenue diversification and risk-adjusted returns, while the reduced reliance on secured forms of funding strengthens financial flexibility.

Provision for loan losses grew 42% QoQ to $160 million with double digit growth in consumer loan originations a primary contributor. Seasonal trends in the loan portfolio as well as normalization in credit performance were also drivers of the higher provisioning expense. Credit losses for the North America consumer loan portfolio were 90 basis points higher QoQ at 3.2%, while delinquencies were marginally higher, but all asset quality metrics remain below historical levels. Importantly, DBRS notes that GMF continues to generate solid levels of pre-provision income (IBPT) that are more than sufficient to absorb the cost of credit. For the quarter, provisions were 43% of IBPT.

For 3Q14, operating expenses were 6% higher QoQ at $297 million, reflecting continuing infrastructure investment and headcount increase to support the expansion of the GMF product suite. However, DBRS notes that, 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.

Liquidity remains appropriate and well-managed. At quarter-end, GMF held $8.0 billion of available liquidity composed of cash, borrowing capacity on unpledged eligible assets and borrowing capacity on unsecured lines of credit and credit facilities. With regards to capital, GMF’s tangible common equity-to-tangible assets (TCE ratio) ratio was 12.6% at quarter-end, 110 basis points lower than a year ago reflecting balance sheet growth, but still above most of its captive peers.

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

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