Captive finance companies pretty much own the short-term lease market.
Executives for two of the biggest banks in auto lending, Chase Manhattan and Bank One, said in interviews this month that they will surrender leasing market share in 2000 because they can't afford to match the captives, especially on 24-month leases.
'We have clearly slowed,' Ed Tinsley, president of Bank One Credit Co. in Phoenix, said in an interview at the Consumer Bankers Association Auto-mobile Finance Conference in San Francisco. 'We have to make some hard decisions.'
Tinsley said his bank's lease volume in February was off 39 percent from planned volume for the month. Last year's volume was up over 1998 but was 10 percent below target, he said.
Chase Manhattan's Tony Langan said that banks as a group will be much more conservative on leasing in 2000.
'The percentage of leasing provided by banks will decline substantially. The (bank) residuals being set right now are the most conservative in a decade - maybe two decades,' Langan said in an interview at the Consumer Bankers Association conference. Langan is senior vice president of Chase Manhattan Automotive Finance Corp.
According to figures compiled by CNW Marketing/Research, the banks' retreat from new-vehicle leasing has been picking up speed since their collective share peaked at 40 percent in 1998. The firm, which is based in Bandon, Ore., estimates that the banks' share of the retail-lease market will fall to 36.2 percent this year - and to 32.5 percent or lower in 2002.
'Given the scope of the pullback, I expect we may have to revise our estimates downward,' said Art Spinella, vice president and general manager.
In leasing, the customer borrows the difference between the sticker price and the lessor's estimate of what the car will be worth at the end of the lease - the residual value. Leasing companies commonly inflate residual values as a form of incentive because that lowers monthly payments. A lower, more conservative residual cuts the potential for residual losses but raises monthly payments.
Burned by residuals
Banks and captives both got burned on residual losses in the late 1990s. General Motors took a one-time hit of $500 million, mostly for residual losses, in 1997. More recently, Ford Credit disclosed in a report filed with the Securities and Exchange Commission that the parent company and other affiliates paid Ford Credit $3.2 billion in 1999 for interest rate support and other costs on finance and lease transactions.
That was up from $2.4 billion in 1998 and $1.8 billion in 1997.
To put that in perspective, net income for Ford Credit for all of 1999 was $1.3 billion. In the face of that level of support, the banks say they've learned their lesson.
'I would rather tell my leadership that we lost some share, as opposed to me telling them I just adjusted (raised) my residuals to make up for the (declining) lease volume,' Tinsley said.
John Blair, president of Automotive Lease Guide, the industry's benchmark guidebook on residual values, cited several reasons why captive finance companies have a bigger appetite for short-term leasing than banks:
The captives can afford it: 'They (automakers) make a lot of money keeping those factories running, and selling those new cars more frequently, and that money allows them to absorb a lot of incentives,' Blair said.
The captives are in the auto business, period: 'The captives have goals that are different from banks. Banks do not want to be in the used-car business, even though because of leasing, they are. The captives like it. They like to turn around the new car sooner, and they like to have the 2-year-old used car to sell,' he said.
The captives are actually better at it: 'They have an army of people and massive resources at their disposal, all looking at auto finance on a daily basis. And that creates efficiencies,' Blair said.
Tom McAlear, COO of DaimlerChrysler Financial Services (debis) North America, said many banks face big residual losses.
'The reason you see our penetration up, while others are down or stable, is that (other) indirect lenders are getting out of the business now,' McAlear said. 'They thought they had people who knew better than the experts.'
Tim Gates, Red Carpet Lease manager for Ford Motor Credit Co., said customer loyalty is another big payoff for captives.
He said 82 percent of Red Carpet Lease customers bought another Ford, Lincoln or Mercury, compared with 58 percent for bank customers.
'That's a big advantage for us. And it's an advantage for dealers, too. About 61 percent of the Red Carpet Lease customers come back to the same dealer for another vehicle, vs. 47 percent for the bank lease customers,' Gates said in a phone interview.
According to competitors, Ford Credit has switched its preferred form of lease incentive from inflated residuals to the more predictable method of buying down the interest rate. Ford Credit also has cut back its reliance on 24-month terms, where inflated residuals are most common.
Ford Credit's bread-and-butter Red Carpet Lease program was exclusively for 24-month leases until 1998, when the captive started adding 27-, 30-, and 36-month terms. 'Last year, more than half our business was 36 months. That's a pretty big change for us,' Gates said.
Bank One's Tinsley said his bank is dropping 24-month leases even faster. 'In 1997, 24-month was 20 percent of our volume. It's less than 2 percent now,' he said.
Tinsley said he is convinced that automakers are determined to set another light-vehicle sales record in 2000, and that means there will be no letup in factory lease incentives. Last year's sales record was 16,958,267.
'The number 17 million is out there. They're going to get there, somehow. If anything, I think incentives will be really taking off this year. Our role is selling money and financial services, and it can be tempting to get caught up in the captive window and try to chase the market,' Tinsley said.
'Sometimes, we're like drunken sailors,' Tinsley said, in a panel discussion at the Consumer Bankers Association conference. 'Business gets good, and we build infrastructures. Then, business gets bad.'
Jim Henry is a staff reporter in New York