DBRS: GMF 2Q Results Higher YoY on Strong Lease Volumes; Increasing Penetration of GM Sales

Summary:
• GMF reported 2Q15 net income of $186 million, 6% higher than the comparable period a year ago on higher volumes and positive operating leverage.
• Retail loan and lease volumes higher on expansion of leasing portfolio and strong U.S. auto sales supported by improving consumer confidence.
• DBRS rates General Motors Financial Company, Inc.’s Issuer and Senior Unsecured Debt at BBB (low) with a Stable trend.

DBRS, Inc. (DBRS) views General Motors Financial Company, Inc.’s (GMF or the Company) 2Q15 results as solid with strong origination volumes driving revenue expansion and positive operating leverage. During the quarter, GMF originated $9.9 billion of retail loans and leases, nearly double the year ago quarter. Strong General Motors Company (GM) sales volumes, a full quarter of exclusivity on GM leasing, and improving penetration rates underpinned origination volumes.

Total revenues were higher 27% year-on-year (YoY) at $1.5 billion, while the revenue mix continues to shift with the growth in the lease book. Lease revenues were substantially higher YoY, and now account for 40% of total revenues compared to 20% a year ago. Finance income was marginally lower YoY despite growing balances as the increasing origination of prime quality loans is resulting in lower effective yields. Indeed, for 2Q15 the North American effective yield on consumer finance receivables was 12.0% compared to 14.2% a year ago. Nevertheless, the strong revenue expansion outpaced the costs associated with the infrastructure build out resulting in positive operating leverage.

Investments in IT platforms and other infrastructure and personnel to support the full captive strategy and the higher volumes generated by the broader suite of products contributed to the 14% YoY increase in operating expenses. However, GMF’s efficiency ratio (operating expenses as a percentage of average earning assets) improved 30 basis points to 2.8% indicating that GMF continues to gain scale.

Asset quality metrics continue to be solid. North American net credit losses were stable YoY while delinquencies were modestly lower. DBRS expects credit performance going forward to benefit from the continuing shift in the credit mix of GMF’s origination volumes towards a more prime (FICOs greater than 680) and near-prime (FICOs between 620 and 679) customer base. In the quarter, prime and near prime customers accounted for 79.4% of North American loan and lease originations compared to 50.9% a year ago.

DBRS notes that GMF continues to make progress towards its medium-term target of a balanced funding profile. At June 30, 2015, unsecured funding now comprised 40% of total funding up from 23% a year ago.

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.