The Big 3 captive finance companies - DaimlerChrysler Services, Ford Motor Credit Co. and General Motors Acceptance Corp. - reported higher earnings in 2000. GMAC reported record net income of $1.6 billion.
Record light-vehicle sales of 17.4 million units obviously helped their bottom lines. At the same time, some banks and independent finance companies bailed out of the auto finance business - especially leasing - in 2000, generating more business for the captives.
And in GMAC's case, bottom line results are aided by two businesses its rivals don't have: home mortgages and insurance.
Still, the stellar profits are largely an exercise in paperwork, reflecting parent-company reimbursements to the captives for the cost of incentives on leases and loans.
'Reported income figures reflect what they would have made if they were charging market rates on the loans,' said Jay Siegel, a senior vice president at Moody's Investors Service in New York.
If the captives were charging market rates for all leases and loans, he said, they would not be doing anything like the volume of business they did in 2000.
For instance, Ford Credit originated a record 5 million loan and lease contracts in 2000 and reported net income of $1.5 billion for the year. That profit was 22 percent ahead of 1999, but short of a record $1.6 billion in 1995.
For 2001, Ford Credit's goal is to boost net income another 10 percent. That would be a record $1.65 billion for 2001.
Help from above
How much incentive support do the captives get?
In 1999, the last year for which figures are available, Ford Motor Co. made payments to Ford Credit of about $3.2 billion, including support for fleet sales and for incentive programs, Siegel said. That was more than twice Ford Credit's net income of $1.3 billion for the year.
Also for 1999, GMAC reported that 82 percent of its contracts were priced below market rates, Siegel said.
In a March 5 filing with the Securities and Exchange Commission, Chrysler Financial Co. LLC, the U.S. arm of DaimlerChrysler Services, said that the average interest it charged customers on a recent $1.5 billion portfolio was only 6.74 percent, and that it was collecting 5 percent or less on 43 percent of its loans.
DaimlerChrysler does not break out net income figures for its captive finance company.
But it said operating income for the captive increased 20.5 percent to $2.3 billion in 2000, although that included a one-time gain of about $2.2 billion from the disposition of a controlling interest in another subsidiary, debis Systemhaus.
DaimlerChrysler Services originated about 2.1 million lease and finance contracts in 2000, an increase of 12 percent.
Despite the cash flow from parent to the lending arms, net income figures for the captives reflect an honest effort to show how well the lending business performed, said General Motors CFO - and former Ford CFO - John Devine.
'Reported net income is a pretty good indicator of where they think they are,' Devine said in an interview. He insisted GMAC and Ford Credit deserve to be considered profitable on their own.
Moody's analyst Siegel agreed, to a point. The net profit figures are not completely unwarranted, he said, because the finance companies bear the risk of judging a customer's creditworthiness. And to differing degrees, the captives share in the residual-value risk on off-lease vehicles.
'It is not a question of the finance companies being irrational in pricing. It is right to recognize it as a parent company subsidy. It makes sense for the finance company to get payment,' he said.
'If you think about the incentive programs, they are intended to be marketing in nature. The purpose isn't to get the customer to choose Ford Credit instead of a bank. The purpose is to get the customer to actually buy that car.'
Ford Credit's share of Ford's retail business grew from about 45 percent in 1999 to just over 50 percent in 2000, according to Dennis Barrish, profit consolidation supervisor for Ford Credit.
Barrish said Ford Credit's profit would have been even greater in 2000, but the company was still in the process of closing 140 local branch offices and consolidating into eight highly automated service centers nationwide.
That process meant Ford lost some experienced underwriters, the people who largely decide which loans to accept and which to reject.
Performance should improve in 2001 after the last service center opens in May, even though interest rates are likely to rise in 2001, he said. 'Interest rate moves are one of our biggest costs,' Barrish said.
The parent company relationship can cut both ways.
Moody's downgraded DaimlerChrysler credit ratings Feb. 26 when the parent company reported its restructuring plan for Chrysler, and that dragged down ratings for debt issued by the captive finance company as well, said J. Bruce Clark, Moody's senior vice president.
The lower rating takes DaimlerChrysler debt off the shopping list of a lot of institutional investors, which typically are barred by their bylaws from all but prime-A paper. But DaimlerChrysler is still near the top of the 'investment grade' category, Clark said.
DaimlerChrysler warned in its annual report filed with the Securities and Exchange Commission that it may be forced to write down the value of leased vehicles again in 2001 if incentives on new cars continue to depress the resale value of used cars.
GMAC was more optimistic. Like Ford Credit, GMAC has another record year as its goal.
Jim Henry is a staff reporter in New York