Ford Credit and General Motors Financial, the lending arms of their respective auto makers, are both laboring under falling vehicle values and elevated loan losses, but Ford Credit is healthier than its rival, Moody’s said Monday.
Ford Credit’s long tenure as Ford Motor Co.’s
captive finance company leads to greater portfolio stability than General Motors Financial, which is still ramping up its captive finance operations for General Motors
from its legacy subprime platform, the credit-ratings agency said in a report. Captive finance firms are subsidiaries meant to provide financing to customers buying the parent company’s products.
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Both Ford Credit and GMF have below-average profitability compared with their historical performance, as shown in the following chart. That’s due to elevated losses in recent periods and declining vehicle values. The multi-year reduction in GMF’s profitability also reflects the transition of its portfolio to captive finance operations for General Motors, Moody’s said. GMF’s launch of a prime asset-backed securities shelf in the first quarter is a significant step in its transition to a full captive, Moody’s said.
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GMF has managed its transition to captive finance without noteworthy disruptions to its performance. Nonetheless, its portfolio will experience more changes because of the disposition of its European operations, increased prime [higher credit-rated] loan originations and an elevated lease exposure, Moody’s said.
In addition, GMF’s interest expense is increasing slightly more than Ford Credit’s as it prepares for more growth and increases its higher cost unsecured funding, which should also increase its supply of unencumbered assets, a credit-positive, Moody’s said.
GMF has higher lease exposure, a credit-negative. GMF’s operating leases were 44% of total loans and leases as of the end of March, though growth of leases has slowed from prior periods. Ford Credit’s operating leases were 20% of total loans and leases as of the same date, below the industry average and a credit-positive.
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GMF’s charge-offs are significantly higher owing to its larger subprime exposure. GMF’s subprime portfolio (borrower FICO scores below 620) comprised 12% of earning assets as of the end of March, while Ford Credit reported its “higher risk business” to be 5%-6% of the U.S. loan portfolio.
Notably, the two portfolios are not entirely comparable, however, because Ford Credit’s originations support Ford sales only, while GMF’s originations support GM sales as well as non-GM sales from the legacy AmeriCredit platform. GMF’s subprime concentration has declined significantly in recent periods, Moody’s emphasized.
GMF’s rapid expansion will pause temporarily with the sale of its European operations but will also remove a sizeable and stable retail loan portfolio, increasing the importance of improving the credit quality of the U.S. portfolio. Ford Credit’s annualized total portfolio growth of 9.2% as of March 2017 will continue to track near historical norms unless interest rates increase materially.
Moody’s rates Ford Credit Baa2 with a stable outlook. It rates GMF Baa3 with a stable outlook.