Jason Grohotolski monitors auto finance captives, Ally Financial and some other noncaptive finance providers as senior analyst for Moody’s Analytics’ financial institutions group in New York.
He sees several market-defining themes at this stage in the automotive cycle: softening growth, increased subprime lending and rising numbers of off-lease vehicles on their way back to the market.
But one theme he sees doesn’t get as much attention as the others. That’s the critical role captives play for dealerships in today’s auto-lending market.
Grohotolski spoke with Automotive News Staff Reporter Hannah Lutz.
What makes captives reliable lenders for dealerships?
The captive’s objective is to provide financing for the consumers of the manufacturer regardless of the macroeconomic environment. At a time like now, dealers have multiple options -- many banks, the captive finance company or even credit unions -- to fund their loans. When the market is a little more questionable, banks tend to pull back, and they may not always be an avenue for the dealer.
The captive finance company is a constant for the dealer throughout difficult market cycles. You may have more consistency from the captive finance company vs. the bank because the captive’s mission is to support the manufacturer.
Captives generally are full-spectrum lenders for the manufacturers, so they are commonly offering commercial financing to the dealer, floorplan lending, leasing and retail loans. It’s more of a consistent, full-spectrum lender. That’s an important relationship between the finance company and the dealer as well.
Is the effect of high lease penetration on vehicle sales a concern?
In general, the large leasing volume does create more risk for the captive finance company. That’s something that they need to weigh as far as how much of that risk they’re comfortable taking on.
If you look at where we’re at today, leasing volumes are back to pre-credit crisis levels for some of these companies if not even somewhat higher. At the pre-credit crisis level for a finance company, as a percentage of loans and leases, it wasn’t uncommon to be 20 percent or higher. Broadly speaking, we’re back to that place right now. Clearly leasing is a very popular way to finance a car right now.
What will residual values look like in the next few years?
We’re in a growth market, but it’s a softening growth. Leasing volumes are growing. With that, lending institutions are taking on more and more residual value risk. That has the potential to create more earnings volatility for these companies when leases mature.
The consumer preference has gone back to SUVs over cars as gasoline prices declined. Naturally, a lot of SUVs are higher priced and a lot of them tend to be leased. When those leases mature, the consumer preference at that time will really dictate what the residual values are.
Where do used-car values stand compared with historical rates? Where are they going?
They’re at pretty strong levels from a historical perspective, and I think that’s been pretty supportive of the industry. We’ll get some softening of used-car values, but I don’t think it will be anything drastic. On an absolute level, it should hold up pretty well. The supply-demand dynamics will be supportive of that. It’s a favorable backdrop for the industry. As far as leasing goes, companies really started back with leasing in the past couple years. Those cars will start coming off lease. That will put some downward pressure on the market in the near term, but will be relatively measured.
Are you concerned about subprime loans and the risk of heightened delinquency or default rates?
Yes. There are a couple different things going on. You have some extended-term loans that are getting a lot of attention, like the 84-month loan, but that’s really a mixed story. A lot [of 84-month loans] are given to high credit quality borrowers. The losses will inevitably increase with long-term loans to weaker credit borrowers.