DBRS: GMF’s Continuing Build out of Full Captive Capabilities; One-Time Items Impact 4Q Results

Summary:
• GMF reported 4Q14 pre-tax income of $120 million, a 42% reduction from $208 million in 3Q14.
• Lower 4Q14 earnings, QoQ, on reduced net finance revenues, an increase in operating costs due to investments and non-recurring items.
• 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 Motors Financial Company, Inc.’s (GMF or the Company) 4Q14 results as acceptable, impacted by the continuing build out of its capabilities and product suite to support its parent, General Motors Company (GM). Moreover, DBRS views the closing of the acquisition of the China joint venture (JV) from Ally Financial, Inc. and GM’s announcement that GMF would become the exclusive provider of subvented leasing for Buick, Cadillac and GMC vehicles as further advancing the evolution of GMF into a full captive of GM. For the quarter, GMF generated pre-tax income of $120 million compared to $208 million in the prior quarter. Investments in infrastructure and personnel to better position the Company for expected volume growth as well as non-recurring items in the International segment related to derivative adjustments and litigation items contributed to the lower sequential earnings. Importantly, with a full product suite in place to support GM and GM dealers, DBRS sees GMF as well positioned for growth and expects the Company will benefit from economies of scale over the medium-term.

Net finance revenues were 4% lower on a linked quarter basis at $562 million. The ongoing shift in the mix of earning assets to higher quality loans and leases compared to the legacy high-yielding AmeriCredit portfolio along with an increase in interest costs contributed to the reduction. Interest costs were higher reflecting the proactive issuance of unsecured debt ahead of expected growth in earning assets as well as the continuing shift in the Company’s funding profile from predominately secured to a more balanced profile.

Loan volumes were largely flat QoQ primarily due to seasonally weaker volumes in the AmeriCredit subprime business. Importantly, GM-related volumes were higher across all products and regions. Lease volume was up 22% on strong GM sales and increasing GMF penetration of GM sales. Lastly, during the quarter, GMF completed the roll-out of its prime lending product to GM dealers.

While provisions for loan losses were higher QoQ at $196 million, asset quality metrics were seasonally higher but broadly stable year-on-year. Post-acquisition allowance build in the International segment’s consumer portfolio as well as growth in consumer earning assets were the primary contributors to the increase.

Capital benefited from a $700 million contribution from GM with the closing of the China JV as well as a $300 million deferred tax liability obligation that was payable to GM that was converted to capital. As a result, the Company’s tangible common equity-to-tangible assets ratio was a very solid 13.2%. Leverage (net earning assets-to-tangible net worth) was 6.5x, a half-turn lower than at the end of 3Q14, and well within the Company’s limit of 8.0x.

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.