DBRS: GMF 1Q Underlying Results Lower YoY; Strong Volume Growth; Higher Costs from Product Build Out

Summary:
• GMF reported 1Q15 net income of $150 million, a 3% year-on-year (YoY) improvement from the comparable period a year ago. However, underlying pre-tax results were 16% lower YoY at $186 million.
• GMF’s 1Q operating performance demonstrated the benefits of having a full suite of products to support GM as a global captive, but financial results were impacted by the costs associated with the investments required to build the presence.
• 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) 1Q15 underlying results as satisfactory. For the quarter, GMF reported underlying pre-tax income of $186 million, a 16% YoY reduction, excluding $28 million of income associated with the recently acquired investment in the SAIC-GMAC JV in China. Overall, DBRS views the quarter’s results as demonstrating the benefits of GMF’s now complete product suite, which allows the Company to meet General Motors Company (GM) customers and dealers needs more broadly and globally. However, the up-front investment costs required to build out these capabilities continues to be a headwind to improving profitability. Nevertheless, with origination volumes accelerating in 2015 DBRS sees GMF as likely to achieve the necessary economies of scale required to drive a strengthening in earnings generation as the Company exits 2015 and heads into 2016.

GMF’s strong origination volumes were underpinned by GM’s announcement in the quarter that GMF would be the exclusive provider of subvented leasing for Buick, Cadillac and GMC vehicles combined with good overall demand for GM vehicles. In 1Q15, GMF origination volumes grew 70% YoY to $7.1 billion supported by substantial growth in North American leasing volumes. Indeed, North American lease volumes were $2.8 billion in 1Q15 compared to $0.5 billion a year ago. Retail loan origination volumes were also noticeably higher benefiting from GMF’s prime loan product, which was available for a full quarter and good growth in used vehicle originations, which more than offset a modest reduction in AmeriCredit product volumes.

Higher origination volumes were a key drive of the expanding revenue generation at GMF. For the quarter, revenues grew 23% YoY to $1.35 billion. Anchoring the expansion in revenue was a more than doubling of lease related income to $431 million due to the aforementioned growth in leasing activities.

Investments in infrastructure and personnel to support the full captive strategy and the higher volumes generated by the broader suite of products contributed to the lower YoY earnings. Operating costs were higher while the growing lease portfolio resulted in leased vehicle expenses to more than double to $327 million. While GMF continues to make progress on a more balanced funding profile, interest expense rose 21% YoY, reflecting the increasing presence of unsecured debt.

Credit performance of the loan portfolio remains solid. North American net credit losses and delinquencies were seasonally lower on a sequential basis while international performance was stable despite the uneven global economy. Moreover, DBRS expects that with the ongoing shift in the credit mix of GMF’s origination volumes towards a more prime (FICOs greater than 680) and near-prime (FICOs between 650 and 679) customer that asset quality metrics will migrate towards those levels observed across the auto lending industry peers with similar credit mix. DBRS notes that in 1Q15 prime and near prime customers accounted for 69.3% of originations compared to 37.4% a year ago.

GMF’s balance sheet remains solid supported by ample liquidity and appropriate levels of capital. At March 31, 2015, GMF had $10.9 billion of available liquidity, including $2.1 billion of unrestricted cash and no term debt maturities until 2016. Leverage (net earning assets-to-tangible net worth) remains below that of most of its captive peers at 6.9x, nearly a half-turn higher than at the end of 2014, but 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.