One of the more intriguing data points brought up by Bloomberg TV‘s David Westin is a recent J.D. Power industry study that found that as many as a third of vehicles traded in this year were below “C-level” or subprime, meaning that the equity level on the car was less than what was owed on it. When asked whether this was concerning for GM, Stevens replied that it’s vital to remember GM Financial’s roots.
The captive finance arm was the result of GM’s 2010 purchase of AmeriCredit, whose core competency was subprime financing. Stevens points out that AmeriCredit “never lost money” during the last financial downturn thanks to their specialty of managing subprime credit risk. Though Stevens doesn’t say it outright, the implied message is that GM Financial has retained this core competency.
What’s more, the CFO points out that the level of GM Financial’s originations in subprime business hasn’t grown over the last number of years since the subsidiary has been focused on growing the prime side of its business. If that wasn’t enough of a reason to give GM the benefit of the doubt, Stevens also points out that GM’s credit performance has been really steady and that the automaker monitors its performance in these areas very closely and thinks that it in good shape today.
Still, like in any lending business, there is still a good amount of risk: in case of a downturn, GM Financial’s biggest risk is residual values — the value of the vehicle after a certain amount of time or use. Residuals is an area which leasing lenders have struggled to predict correctly, often estimating that the value of a vehicle to be more than it actually will be when the lease comes to an end, thereby losing money on each vehicle leased. To that end, Stevens points out that all of GM’s leases go through GM Financial and that GM has very robust data modeling in setting residuals that is closely linked to lease guides and used car pricing.
The automaker is also taking steps outside of the lease business to ensure that the values of its cars are optimized on the used car market. These include the well-publicized move to reduce GM’s reliance on selling new cars to daily rental fleets, while increasing its focus on boosting retail deliveries that are not only more profitable for GM, but also help stabilize and increase residual values of used cars. In addition, Stevens also points out that GM Financial handles all of GM’s used car remarketing, optimizing supply and demand of used vehicles to improve residuals.
When asked whether the projected of 3-4 million vehicles per year projected to come off leases over the next few years will put downward pressure on used car sales, Stevens states that GM’s planning includes seeing used car prices moderate to more normal levels in the future, compared to relatively-high levels of today.
Stevens explains that leasing typically makes up roughly 25 percent of sales across the industry. But during the last downturn, it fell to almost nothing at GM (as a result of its bankruptcy). Now, Stevens says, leasing is building back up to natural levels, with the automaker seeing used car prices moderate in some areas, especially on the car side; trucks and SUVs, by contrast, continue to be very strong.