GE Capital Auto Financial Services is taking a major hit on residual values.
The company, a leasing pioneer and one of the biggest independent auto leasing companies, has reined in its predicted residuals. On the average, its new-vehicle residuals are now 1.4 percent to 2.9 percent below the widely used Automotive Lease Guide, a spokesman for the guide confirmed. Two or three years ago, when the leases expiring today were written, GE Capital was consistently above the Automotive Lease Guide.
A higher residual means lower monthly payments, since the customer has to finance only the difference between the transaction price and the residual. Leasing companies commonly inflate residuals to reduce monthly payments. At the end of the lease, that may mean a loss on vehicles returned to the lessor and sold at wholesale auctions.
GE Capital cited residual losses as one reason for the decline in operating profits for Consumer Services, the GE unit that includes Auto Financial Services. Profits fell from $1.3 billion in 1996 to $563 million last year. A GE Capital spokesman said 'a profound majority' of that decline resulted from problems with GE Capital's credit card portfolio. GE Capital provided credit cards for Montgomery Ward Holding Corp., which filed a bankruptcy petition in 1997.
GE Capital does not break out separate results for the auto finance subsidiary. In a phone interview this month, Sandra Derickson, president of Auto Financial Services, said only that the auto unit was 'very profitable' overall in 1997.
She also acknowledged that for the first time, the company lost money on selling used cars at auction in 1997.
Said Derickson: 'We are looking at a number of things that have an impact on the business -the impact of manufacturer subvention; rental-car concentration; the number of off-lease units, in an environment of depressed used-car prices; the reduction we're seeing today in new-car prices. These are all contributing factors.'
Separately, Auto Financial Services informed its employees April 14 of a major restructuring. It includes closing or cutting back six U.S. regional offices and layoffs for an unspecified number of workers in the field. As many as 300 jobs could be moved or lost, out of a company total of about 2,300 in North America.
The number of lost jobs depends on how many people accept offers to move to the headquarters in Barrington, Ill.
Losses on residuals are an industrywide problem. Respondents to the recently released 1998 Automobile Finance Study of the Consumer Bankers Association (see story below) reported an average loss of $1,756 per unit on off-lease vehicles returned to the leasing company. The association said that 75 percent of off-lease vehicles that go through auctions generate a loss. Most off-lease vehicles are purchased by the lessee or the dealer, thus the leasing company does not have to sell them at auction.
DEPENDS ON LEASING
On two-year leases, as many as 80 percent of off-lease units end up in the hands of the leasing company, a Bank of America executive said recently. Derickson said GE Capital is in the same ballpark on two-year lease returns.
Two other factors could worsen the situation for GE Capital.
First, GE Capital is more dependent on leasing than most other auto finance companies. Its worldwide auto lease portfolio was $15.4 billion at the end of 1997, vs. $9 billion worth of auto loans.
Second, GE Capital has a big share of lease business for Chrysler Corp. products. Leasing experts say many Chrysler products are generating residual losses at lease end. Besides cars, that includes many light trucks that are scheduled to come off lease this year, including a large number of Jeep Grand Cherokees.
Neither GE Capital nor Chrysler would disclose GE Capital's share of Chrysler's lease business, but industry experts said the two companies have had a close relationship, dating back to when Chrysler's credit rating was not as good as it is today and Chrysler was steering lease business away from Chrysler Financial Corp.
DUE DAYS FOR HONDA
The Honda brand represents another major chunk of GE Capital's lease portfolio. Honda has a track record of holding its residual values, but Honda's lease volume increased sharply in 1995, an increase of about 38 percent in the first nine months of 1995, according to registration data from Polk Co. Three-year leases written then expire this year, and a higher number of off-lease cars could affect used-car values.
GE Capital resists linking its restructuring to the residual losses. 'We haven't had a major restructuring since 1978, and the nature of our customers has changed since 1978,' said Derickson.
To the greatest extent possible, the restructuring will result in one GE Capital representative calling on each dealer, instead of as many as five or six calling on the same dealer.
That redundancy has been a big problem for the new megadealership groups, since they have operations in several regions of the country, she said. Auto Financial Services does business with more than 10,000 dealers worldwide.
'It's more of a shift than a reduction,' she said of the restructuring, but she acknowledged there will be a 'net minus' in jobs.