After its acquisition of AmeriCredit in Q4 2012, General Motors has substantially increased its amount of subprime lending. From Q4 2010 to Q1 2012, GM Financial (as AmeriCredit was subsequently renamed) loans to customers with the worst FICO scores (below 540) increased 79 percent to more than $2.3 billion; meanwhile, lending to the second-worst category (540-599) rose 28 percent from $3.4 billion to $4.3 billion.
But in a note to investors last month, Moody’s warned that the subprime auto lending market is experiencing the same kind of heated competition and poor underwriting that resulted in unexpectedly high losses in the mid 1990s. Moody’s did mention that loan performance has been strong throughout the last few years, but lenders should exercises caution of deteriorating standards in order to increase profits and market share.
The GM Financial results and the Moody’s report lead us to ponder the possibility of GM getting into trouble as it takes on an increased amount of subprime loans that may, according to Moody’s, eventually lead to losses. Simply put, which automaker would suffer the most from trouble in the sub-prime sector? Logic would dictate the answer to that question would be GM, which has substantially increased its amount of subprime loans via GM Financial.
However, GM spokesman Jim Cain chimed in on the situation by saying that GM acquired AmeriCredit “precisely because they are experts in less than prime/sub prime financing, which is a key segment for all high volume automakers”. Cain also added that “It also was a segment of the market where we were not represented due to our bankruptcy and Ally’s challenges” and that “GM Financial complements our other lenders and leasing partners, which include Ally, US Bank, Wells Fargo and others.” Also, GM doesn’t “rely on a one-stop shop like Ford Credit or the old GMAC.”
Perhaps more important is the fact that as “of Q1 2012, sub prime financing represented only 8 percent of GM’s US sales (up 2.1 points YOY)” and that GM’s “mix is only 2.2 points higher than the industry average.” Moreover, a whopping 92 percent of GM sales were not financed to subprime buyers and “GM Financial’s share of all GM U.S. sales and lease originations is 23 percent”. Not only that, but the credit losses experienced by GM Financial are very low — 2.5 percent of the average finance receivables, according to Cain.
The GM Authority Take
In other words, GM Financial is a tightly-run ship, as evidenced by the lower percentage of losses, and is by far not the only game in town when it comes to buying or leasing a GM vehicle.
Good on you, GM and GM Financial. Let’s hope it stays this way.