GM Financial is strengthening its loan portfolio with more prime loans by using subsidized deals.
General Motors has moved to reduce its dependence on subprime loans, according to a new report from Moody’s Investor Services.
General Motors Financial, the Dallas-based finance company GM acquired after it escaped bankruptcy in 2009, had its roots in the sub-prime finance business that fell into disfavor during and immediately after the 2008-2009 recession.
However, as car sales recovered, the company’s collection of lower-than-prime loans, meaning loans to consumers with scores less than 680, began growing, hitting a high 83% of the portfolio in 2014. Since that high water mark, the finance company’s reshaped its portfolio.
Moody’s, in a new report issued this week, noted “significant growth” in the North American prime loan portfolio of General Motors Financial, starting in the middle of 2015.
The growth has helped level off the concentration in near-prime loans and reduce its concentration in sub-prime loans, though they continue to comprise the bulk of the company’s portfolio, Moody’s noted.
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“However, GMF’s sub-prime portfolio is still sizeable and will keep the company’s risk profile above that of other captive auto finance companies even after the prime loan portfolio grows to its full potential,” Moody’s said.
“The credit quality of GMF’s loan portfolio should improve steadily as the proportion of prime loans increases relative to near-prime and sub-prime loans.”
Moody’s suggested the shift toward prime loan originations is due to increased subvented loan originations for General Motors vehicle sales, which will steadily improve the credit quality of GMF’s loan portfolio as it integrates with GM.
A subvented loan has an artificially low interest rate designed to entice buyers to use a captive finance arm, like GM Financial. It’s subsidized by the automaker.
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The most significant improvement in credit quality will be in 2016-17, followed by general stabilization thereafter. The growth of GMF’s North American prime loan portfolio in the second half of 2015 was due to GM’s decision to move almost all of its subvented loan originations to the company during the year. Prime loans comprised 24% of the portfolio as of 2015 year-end versus 12% six months earlier.
The company will have additional opportunities for prime loan portfolio growth through origination of non-subvented loans, but since competition from other lenders will limit profit opportunities, growth will be slow.
With car sales continuing to boom, the auto industry got another warning last month about easy credit as Fitch Rating reported that delinquencies on U.S. subprime auto-related asset backed securities have reached a level not seen since the 2008-2009 recession.
The underperforming loans, which have been bundled into securities sold to investors, come from recent vintages driving the increase, according to Fitch Ratings. A recent report from Experian also noted rising level of delinquencies in car loans.
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In addition, analysts from J.D. Power & Associates noted consumers are opting for leasing and long-term loans at record levels. During February, leases and loans of 72 months or longer combine to represent 65.1% of all retail sales, a record level for any month. The previous record was set in January 2016 at 64.3%, according to John Humphrey, J.D. Power & Associates analyst.