Podcast: ‘Weekly Wrap’ discussion on captive earnings

Joey Pizzolato 00:04
Hello, everyone and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter on automotive lending and leasing. It’s Monday, July 31. And I’m Joey Pizzolato joined by Amanda Harris and Johnny Martinez. This is our weekly wrap on what happened in auto finance for the week ending July 28 2023. In general economic news, the Federal Open Market Committee raised interest rates another quarter of a point last week, bringing the Feds target funds rate to 5.25% to 5.5%. Marking the highest interest rate in 22 years. The FOMC left open the possibility of additional rate increases later in the year. They meet three more times this year in September, October and December. Gross Domestic Product rose in the second quarter by more than most economists estimates as what in was propped up by strong consumer spending and business investment GDP rose at 2.4% annualized rate after a 2% pace in the previous three months. According to the Commerce Department. positive GDP coupled with fewer applications for unemployment benefits and stronger than expected orders for business equipment have revitalized talks of a soft landing. In auto finance, the remaining automotive retailers reported earnings last week and Asbury automotive f&i revenue declined 18% year over year $166 million and F&I GPU is down 1% year over year in $2,363. floorplan interest expense drop 47% year over year and 800,000 Lithia Motors saw 2% year over year decline in f&i revenue to 338 million f&i GPU dropped 3% year over year to just over $2,000 and floorplan interest expense surged 803% year over year to offset 35 million. Group one f&i revenue was essentially flat and 190 million, while f&i GPU dropped 4% $2,000. floorplan interest expense increased 164% year over year to 15 point 6 million finally, Penske automotive tallied a 3% year over year decline in f&i revenue 214 million f&i GPU fell 4% year over year to just over $1,800 and floorplan interest expense clocked in at $31 million or 402 100 Excuse me in 42% year over year increase. GM Financial Ford credit and Driveway Finance also reported last week, Amanda what’s going on there?Amanda Harris 02:42
Sure, so overall, you know, captives auto books performed pretty well. GM financials loan originations were up 1% year over year at $9 billion amid improved you know retail sales, elevated average loan amounts all that kind of driving up origination volume it was offset slightly by a decline in loan share. They did see that offset it Ford Credit, their US consumer loan and lease outstandings clocked in at 79 Point 3 billion which is up about 3% year over year. So both those captives did see a slight increase year over year. Control is a little bit of a different story. But they are seeing a little bit of growth compared to where they were last year. Driveway Finance which is Lithia Motors finance arm, they did see a decline in originations, at least when you compare it to last quarter. So it’s about 508 million compared with about 630 million in q1, their penetration rate also dipped as Lithia motors is really focusing on you know probabilities steadily growing the captive. So they’re not really trying to rush out there and grow DSC as it’s known pretty quickly they’re trying to you know, grow this while keeping margins you know, very protected and keeping an eye on yield and profitability. So that’s why I didn’t you know, did see a slight dip their their receivable totaled about 2.8 billion at the end of q2. So you’re kind of seeing them you know, focus on growing that captive and getting it to where they want it to be. They do have their goal in mind of where they want it to be as far as profitability and origination volume and in the portfolio size. They’re working toward that. On the leasing front leasing is climbing up some GM financials lease originations were up about 80% sequentially, and Ford Credit’s leasing share rose to 12% Compared to 11%. Last quarter. To put that in perspective, fours leasing shares still down from the industry average at 20% which is pretty normal for them. So nothing really abnormal there. But we are starting to see leasing come up a little bit which we knew was going to it was going to start coming back, especially as used vehicle values decline again. So that’s kind of normalizing credit performance across the board align with expectations. Pretty much delinquencies were either flat or they went up a little bit. So GM financials delinquencies were flat sequentially and year over year at 1.8%. Their allowance For Loan houses was down about 10 basis points year over year. So seeing that in about 3% of the portfolio, and then Ford’s loan and leases for credits delinquencies were down about two basis points, quarter over quarter, but up one base 20 every year. So again, nothing too, too crazy. They’re either slight dips or slight increases or, or flat really, it’s kind of what we’re seeing across the board with earnings. And lat long, their loss ratios again, same thing, they’re either up a little bit, you maybe doubled it in like 1014 15 basis point range, but they’re not really jumping up any crazy. And then Ford’s repossession rate was down a little bit and their credit loss reserves were flat year over year, so nice to see any red flags there. And then for driveway, they’re delinquency rates actually went down across the board year over year, because they are really focusing on, you know, high credit quality loans. So they had their FICO score went up across the board, they’re really focusing on you know, lending to those high credit quality customers. So again, that also goes in tandem with their, you know, maybe a little bit of a dip in originations, because they’re, they’re really focused on how they’re growing this and who they’re growing this with. So we’re gonna probably see them maybe steadily increase, maybe slight dips here and there is we’re really focused on quality over quantity right now. And growing that captive prudently. So kind of be interesting how that plays out. And their allowance was also 3.2%. So it wasn’t anything crazy their rows a tiny bit, because they’re just, you know, as US vehicle values decline, they’re preparing for that, to kind of play out. Again, a theme that we’ve been playing out all earnings season is just as focused on higher margin lines of business, it’s focused on profitability, this focus on keeping you know, margin strong, especially as usually vehicle values, you know, come down new vehicles, you know, are also kind of seen price cuts across the board, too, especially in the IDI side, which Ford is a big Evie player, as well. So I’m sure that that plays a part in things too. So as we see more earnings come in, we’ll probably see this this theme continue to play out, I would imagine, you know, credit performance being not anything too big, but in line with expectations of maybe slight increases in delinquencies, slight increases in loan loss, you know, allowances just as they prepare for what could come the rest of the year as values decline. And as you know, inflation keeps being a problem. And affordability keeps being your problem and they’re preparing for for things to worsen on that side of things. So stay tuned.Joey Pizzolato 07:33
Thanks, man. And powersports Harley Davidson Financial Services is feeling squeezed. Johnny has the details.Johnnie Martinez 07:42
Yeah, so during a rally defense and earnings call, their chief financial officer Jonathan Root, reported that Harley Davidson Financial Services originations were down 14% year over year. And so that origination decline on its own, maybe not enough to hit the panic button. But then they’re also talking about their real estate credit losses were up seven basis points, sequentially. 120 year over year, the provisions for credit losses nearly doubled from year to year, going into q2 and, you know, even their allowance for loan losses went up 20 basis points sequentially 30 basis points year over year. So you’re seeing this this, the effects happening in the wider financing market. There’s this tightness coming. There’s these concerns on the building. So you know, even in a quarter where Harley Davidson finance services and receivables were 7 billion were up sequentially and year over year, and the revenue was up a little over 18% year over year, there’s still this tightness in the market this concern in the market and so, you know, Harley Davidson is, you know, already adapting to it. With them being such a large player in the onroad segment, right what they’re doing, you’re probably gonna see some of this trickle down into what some of the smaller captives are doing and even smaller financial service people are doing in this space to adapt to what’s happening in on road and really what’s gonna happen in powersports as a whole as we get some more of these q2 earnings.Joey Pizzolato 09:11
Great. Thanks, Johnny and more earnings this week coming up. We have Credit Acceptance Corp reports tomorrow as, as does Camping World reports on the first. That about does it for today’s episode. Thanks for joining us on the roadmap and be sure to follow us on Twitter and LinkedIn. We will see you online and auto finance news.net and here next time