FCA Expected to Launch Captive, Despite Santander’s Efforts to Court OEM

Fiat Chrysler Automobiles Group is expected to announce the formation of a U.S. captive unit on Friday, thus diminishing volume to lending partners such as Santander Consumer USA and Ally Financial Inc., according to a Bloomberg report.

The announcement is expected to be part of a larger strategic push by the OEM’s Chief Executive Sergio Marchionne, who is planning to push Jeep- and Ram-branded SUVs as well as Maserati luxury cars in favor of some of its legacy name brands such as Fiat, Dodge, and Chrysler.

The captive finance unit is expected to be structured similarly to other U.S. competitors in the space, but leaves lingering questions for the future of its current finance partners.

Santander Consumer originated $1.9 billion in Chrysler Capital retail loans in the first quarter — a 24% increase year over year, according to earnings. Those FCA originations accounted for 46% of Santander’s total loans for the quarter. While leases are not broken out by brand, Santander originated $2 billion of auto leases, most of which were likely made on FCA vehicles. 

Santander made a point of repairing its relationship with Chrysler late last year. In October 2017, newly appointed Chief Executive Scott Powell appointed Rich Morrin as president of Chrysler Capital and auto relationships in an effort to put a single point-person with a long history of leadership at Santander in charge of the lender’s most important partnership, AFN previously reported.  

“FCA is a very important relationship for SC, and the team and I are focused on identifying opportunities to assist FCA in selling more vehicles and to utilize incentive spending more efficiently,” Morrin told AFN in January.

Additionally, the company opened a flow agreement with its Spanish parent Banco Santander SA in an effort to open up more funds for prime lending to FCA consumers. While those efforts have boosted volume, the penetration rate has fallen below expectations.

As of March 31, Santander recorded a 28% penetration rate for Chrysler Capital loans — up from 23% in the prior-year period, but well below the April target of 65% set by the original agreement between the companies.

The partnership was signed in 2013 and was expected to last 10 years, however, it includes a termination provision if the lender fails to meet origination goals within the first five years — which, for those counting, would occur this year — according to regulatory filings.

“We can’t speculate on FCA’s strategy for its U.S operations,” a Santander spokeswoman told AFN in a statement. “Santander is the preferred provider for FCA’s consumer loans and leases and dealer loans via Chrysler Capital, and we continue to operate in the existing agreement, which began in 2013.”

Ally Financial also originates for FCA. Last quarter, Ally originated $9.5 billion in auto loans — 26% of which came from Chrysler.

“Ally has created a strong business as an independent, market competitor,” a company spokeswoman told AFN. “Ally will continue to support FCA dealers nationwide with a full spectrum of industry-leading, auto finance products and services.”

The Bloomberg report sparked a reaction on the stock market in which Santander dropped as much as 9.6%, the company’s steepest intraday drop since July 2016. The stock recovered slightly, falling 6.5% on the day. Similarly, Ally erased earlier gains on the day to drop 1.2%.

However, Mark Palmer, equity researcher with BTIG, believes the investor response is overblown and notes the initial negative reaction investors had when General Motors decided to form its own captive in 2015 and diminish its relationship with Ally Financial.

“The extent and impact of GM’s shift on Ally ultimately proved to be significantly less than initially feared, and we believe such is likely to be the case with Fiat/SC if the automaker does indeed create a U.S. captive finance arm,” he wrote in a note to investors.