General Motors’ Move To Make GM Financial A Genuine Finance Arm Will Carry Casualties

When General Motors purchased subprime lender AmeriCredit in July 2010, the acquisition was billed as a way to help consumers with tarnished credit attain loans and increase the amount of leases GM provides to buyers. But immediately after finalizing the acquisition, GM rebranded AmeriCredit to GM Financial, entered the commercial (dealer) loans sector and — roughly two years later — announced that it would enter the prime lending market in early 2014.

Granted, the prime lending effort will start out on a limited basis in North America in dealerships with which GM already has a commercial lending relationship. Supporting that claim are comments by GM Financial CEO Dan Bierce stating that the goal isn’t to become the “predominant” prime lender for GM dealers or to “supplant the banks and other providers in this market”. The move should, however, help in achieving “strong growth in our earning asset base over time.” But just like the initial AmeriCredit acquisition, it’s likely that this is just the beginning.

The reasoning behind GM Financial’s foray into prime lending revolves around reducing the risk of a subprime-heavy portfolio. In fact, a whopping 85 percent of GM Financial’s portfolio was comprised of subprime loans in 2012, with delinquencies growing by $200 million to $933 million. By contrast, GM Financial’s prime loans have default rates in line with the industry average.

Ultimately, the decision to move into prime lending and to expand internationally will transform GM Financial into a full-service captive finance arm, resulting in a business unit that allows GM to deliver a full-service buying experience while profiting from all avenues of a vehicle transaction — the sale of the vehicle and the associated lending. In that regard, something tells us that turning AmeriCredit into a full-fledged captive financial organization was GM’s goal from the get-go, when it acquired the Texas-based firm under the reigns of then-CEO Ed Whitacre.

What’s more, GM Financial is now a full-range captive lease provider for The General, with lease originations for GM vehicles growing sharply from $384 million in Q1 2012 to $620 million in the first quarter of 2013. GM Financial has also begun to offer commercial lending products for its dealers in April 2012. According to some reports, GM Financial’s commercial floorplan financing business is seeing major growth, having reported $882.7 million of commercial finance receivables as of March 31 (2013), up from $560 million in December 2012.

And while GM’s Financial’s business is flourishing, there is one stakeholder/partner that stands to lose the most from the success of GM’s captive. That one organization is Ally, which will unquestionably see a chunk of its consumer and commercial lending business — some of which has even been adapted specifically for GM (and for Chrysler) — go to GM Financial. In fact, Ally’s commercial floorplan financing business is already deteriorating, having dropped 3 percent in Q1 2013 on an annual basis.

The turn of events is interesting to watch thanks to the grave irony that revolves around Ally Financial being absorbed by the former GMAC, which itself was Old GM’s captive finance arm. Looks like Ally will need to find itself a new friend outside of The General.