GM Financial's Q2 Net Income Climbs by $40 Million

By Nick Zulovich, Editor
August 03, 2012

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FORT WORTH, Texas — As more than 50 percent of total loan originations came from non-General Motors dealerships, GM Financial posted a $40 million increase year-over-year in second quarter net income.

For the span that ended June 30, the company generated $136 million in net income, up from $96 million in the second quarter of last year.

The performance helped GM Financial record $249 million in net income for the six months of the year. Through the first half of last year, the company recorded $173 million in net income.

The company's second-quarter loan originations totaled $1.5 billion, marking a rise from the year-ago amount of $1.3 billion and the previous quarter's figure of $1.4 billion.

Through the first half of the year, GM Financial said it has generated $2.9 billion in originations, an uptick from $2.5 billion in the first six months of 2011.

The company's outstanding balance of consumer finance receivables totaled $10.4 billion as of June 30.

In explaining the second-quarter performance on Thursday, GM Financial president and chief executive Dan Berce indicated the percentage of loans for new GM vehicles remained steady at around 31 percent of total loans originated.

"GM's current subprime loan penetration of 8.7 percent has increased from 6.9 percent a year ago and remains well above the industry average of 5.9 percent, underscoring our progress in supporting this segment of GM's customer base," Berce highlighted.

"Originations from non-GM dealers have continued at a steady rate comprising more than 50 percent of our total loan originations in the June quarter," he continued. "This important part of our operation is benefitting from our renewed focus on the AmeriCredit product through our deployment of dedicated sales and underwriting teams to support non-GM dealers.

"The origination growth that we saw this quarter and that we expect to see going forward results from market expansion as the auto industry experiences increased consumer demand for new vehicles," Berce went on to say. "That said, we typically see some seasonality in consumer demand for subprime loans and expect our origination volumes to flatten over the back half of the year."

Looking even deeper at the loans originated in the second quarter, GM Financial acknowledged the average APR dipped to 14.0 percent, down from the previous quarter's average of 14.7 percent.

Berce dismissed notions that the drop in average APR was going to hurt GM Financial's income potential.

"The new loans we originated during the June quarter will generate solid net interest margins despite the lower APRs due to the favorable cost of funds we achieved in the securitization market," Berce stated.

"Key loan structure metrics such as loan-to-value and the weighted average custom score of the loans we originated have remained consistent with prior periods," he added.

Berce then turned his attention to loan origination competition GM Financial is facing.

"We continue to maintain a leading share of the subprime loan financing market for new-vehicle purchases in GM dealerships," Berce insisted. "Away from our new GM dealer business, we continue to see growing but rational competition as other lenders seek to take advantage of favorable funding and credit performance metrics in the auto finance market.

"Even with growing competition and some recent flattening of used-car sales volumes, we have thus far been able to increase our volume of AmeriCredit loans and hold our market share while maintaining stable net interest margins and key loan structure metrics as I discussed previously," Berce went on to say.

Company Leasing Activity

The company determined second-quarter lease originations of GM vehicles totaled $394 million, up $10 million from the previous quarter. A year earlier, the lease origination figure was $173 million.

Through six months, GM Financial's lease originations came in at $778 million, marking a significant jump from a year earlier when the company posted $484 million in lease originations at the halfway point of 2011.

Berce then delved into second-quarter leasing performance in the U.S., as well as Canada.

The top GM Financial exec acknowledged Q2 U.S. leasing originations ticked down slightly from the last quarter to $238 million, "but our competitive presence in the leasing market has helped GM's penetration of lease increase to 15.3 percent, up from 12.6 percent last quarter and 13.5 percent a year ago.

"With our full-spectrum lease offering in the U.S., we have also been successful in improving GM's leasing penetration for less-than-prime consumers, which now account for approximately one-third of our U.S. lease volume and represent incremental vehicle sales for GM," Berce pointed out.

Meanwhile in Canada, GM Financial Q2 lease originations moved up from the first-quarter level of $112 million to $156 million

"While we have contributed to significant increases in GM lease penetration since entering Canada in April of last year, the competitive environment continues to favor retail loan products, impacting our Canadian lease origination levels," Berce explained.

"We anticipate adding a retail loan offering to our Canadian product set in the third quarter of 2012, primarily targeting subprime consumers purchasing new GM vehicles," he added.

Credit Performance

Berce said GM Financial's credit performance for its second quarter was "nothing short of phenomenal."

The company's consumer finance receivables 31-to-60 days delinquent stood at 4.1 percent of the portfolio as of June 30, compared to 4.4 percent a year earlier.

GM Financial's accounts more than 60 days delinquent came in at 1.5 percent of the portfolio down from 1.7 percent a year ago.

Berce also mentioned annualized net credit losses were 1.5 percent of average consumer finance receivables for the second quarter, compared to 2.4 percent a year earlier.

"The credit performance for our June quarter was nothing short of phenomenal," Berce declared. "Credit metrics will seasonally weaken in the back half of the year and we expect to see delinquency and losses increase sequentially for the September and December quarters, consistent with our history."

Another highlight of GM Financial's credit performance was connected with its recovery rates on repossessed vehicles. The rate came in at 68 percent for the quarter — the best in company history — representing an increase from 59 percent in the first quarter and 56 percent in the same quarter a year ago.

"Used-vehicle values remain strong due to the continued imbalance between the demand for and supply of used vehicles," Berce noted. "Going forward, we expect used vehicle pricing to fluctuate seasonally and to moderate somewhat for the remainder of the year. In fact, we have already seen the Manheim Used Vehicle Value Index decline year over year for the last few months."

Furthermore, Berce mentioned GM Financial's lease portfolio continued to perform well with approximately 30 basis points of 30-day delinquency at the end of the second quarter.

"While a confluence of favorable events supported our exceptional credit performance, we do not expect them to continue indefinitely," Berce admitted.

"These tailwinds — improvements in how consumers manage their credit and the strength of the used vehicle market — can and will shift over time," he emphasized. "Changes in these macroeconomic factors, coupled with expansion of our credit risk appetite from 2010 through mid-2011, will likely temper the strength of our portfolio credit performance over time."

Update on Dealer Floor Planning

Berce touched on GM Financial's floor planning availability for franchised dealers, a program rolled out this past April. The company positioned the program as an option besides the availability through Ally Financial.

GM Financial now offers inventory finance, floor plan lending, real estate lending for facility upgrades and capital loans to dealers.

"We introduced our suite of commercial lending products for GM dealers in mid-April and we have seen a high level of interest across the GM dealer community," Berce said during Thursday's financial performance release.

"Our initial bookings represent a good cross section of GM dealers," he continued. "Our pipeline of dealer applicants continues to build and we anticipate steady growth in this business line over the next several quarters.

"As a reminder, our goal with respect to commercial lending is similar to U.S. leasing - to build a platform with sufficient scale to support GM dealer customers and provide relevant, competitive alternatives to existing marketplace offerings, but not to be the dominant market player," Berce went on to say.

Closing Thoughts

As GM Financial finished its second-quarter report, Berce indicated how he is aware of what's going on with the general economy and how it could affect the company's prospects.

"While we are mindful that the macroeconomic conditions have recently softened, we are well positioned to keep building on this foundation to generate growth and profitability in the future," Berce stressed.

"We have a tremendous team of people, a strong balance sheet and full support of (General Motors), and we are confident in our ability to execute the fundamentals and maintain our focus on the business," he concluded.

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