As auto-lending risks grow, Ford Credit looks more stable than GM Financial
Published: June 26, two thousand seventeen Two:26 p.m. ET
Ford Credit has a long tenure as Ford Motor’s captive finance company, while GMF is just ramping up, says Moody’s
RachelKoning Beals
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 F, +Two.90% captive finance company leads to greater portfolio stability than General Motors Financial, which is still ramping up its captive finance operations for General Motors GM, +Two.24% 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.
Both Ford Credit and GMF have below-average profitability compared with their historical spectacle, as shown in the following chart. That’s due to elevated losses in latest 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 very first quarter is a significant step in its transition to a utter captive, Moody’s said.
GMF has managed its transition to captive finance without noteworthy disruptions to its spectacle. Nonetheless, its portfolio will practice more switches because of the disposition of its European operations, enhanced prime [higher credit-rated] loan originations and an elevated lease exposure, Moody’s said.
In addition, GMF’s interest expense is enlargening 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, however 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.
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 latest periods, Moody’s emphasized.
GMF’s rapid expansion will pause temporarily with the sale of its European operations but will also eliminate a sizeable and stable retail loan portfolio, enhancing 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 two thousand seventeen will proceed 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.