Revived credit business helps GM finance its future

November 12, 2018 12:00 AM

"We are confident in the opportunity ahead of us and continue to expect strong performance over the short term as well as the long term."Dhivya Suryadevara, General Motors CFO

DETROIT — A business line General Motors pioneered nearly a century ago is expected to begin significantly contributing to the company's future, providing a fount of profits to fund investments in emerging technologies such as electrified and autonomous vehicles.

GM Financial, the company's captive auto financing arm, paid GM a $375 million dividend on Oct. 30 that will be reflected in the GM's fourth-quarter earnings. It's the first in a series of annual payouts GM Financial will pay GM until it consistently holds 50 percent of GM retail sales penetration in the U.S., which is expected to occur in the early 2020s.

The dividend, according to GM CFO Dhivya Suryadevara, will strengthen long-term cash generation and free cash flow — targeted to be $4 billion to end 2018.

"Combined with the ongoing GM Financial dividend and our focus on cost reduction, we see significant opportunity to improve cash generation," she told analysts when discussing third-quarter earnings on Oct. 31. "We are confident in the opportunity ahead of us and continue to expect strong performance over the short term as well as the long term."

GM Financial refers to its leverage ratio — measured as the ratio of net earning assets to tangible net worth — to determine how and when to send capital back to GM.

'True captive'

In 2015, announced a target to more than double pretax earnings of $803 million from 2014 to as much as $2 billion for GM Financial by 2018. Through the first nine months of this year, it was at $1.48 billion.

Suryadevara said earnings for GM Financial will experience "traditional seasonality" in the fourth quarter, but the business will still report "significant" profit growth for the year compared to 2017.

Financing 50 percent of GM's retail sales in the U.S. has been an important goal in delivering on GM Financial's value propositions, said GM Financial CFO Susan Sheffield. "We talk about loyalty and retention and are a true captive at those levels," she told Automotive News this month.

Sheffield: Financing half of U.S. sales is an important goal.

Heir to GMAC

General Motors has a long and recently complex history with auto financing.

1919: GM creates General Motors Acceptance Corp. It becomes the model for modern captive finance companies. Ford follows 40 years later with Ford Motor Credit Co.

1980s-90s: GMAC expands into mortgages and corporate finance.

2006: GM sells a majority stake in GMAC to raise cash.

2009: GM further reduces its stake in GMAC, as both companies receive government bailouts.

2010: GM purchases subprime lender AmeriCredit and turns it into GM Financial; GMAC is renamed Ally Financial.

2013: GM sells its remaining ownership in Ally, and buys many of its international operations.

2014: Ally goes public at IPO price of $25 a share.

2018: GM Financial pays first dividend of $375 million to GM.

GM has a long, complex and pioneering history with captive financing firms. It established General Motors Acceptance Corp. as the industry's first captive finance company in 1919 — decades ahead of others such as Ford Motor Co. The business helped GM weather difficult times in its core automotive business and later diversified into other financial services, such as insurance and mortgages. However, GM sold its majority stake in the company in 2006 in a scramble to raise cash. It further reduced its stake in 2009, as part of its government bailout and bankruptcy restructuring. The rebranded business became the independent bank Ally Financial, which continued to provide financing to GM dealers and customers.

But GM didn't stay out of the financing game for long. In 2010, it formed GM Financial with the acquisition of subprime lender AmeriCredit and has expanded the business by adding services such as prime and floorplan lending and taking or acquiring business from Ally.

In 2015, GM notified Ally that it would steer all of its lease subsidies for its brands in the U.S. to GM Financial, instead of distributing them among Ally, GM Financial and, to a lesser extent, U.S. Bank. The move gives GM more control of its customer data and a better shot at keeping its off-lease customers.

Ally also sold GM many of its international business operations such as China, Europe, South America and Mexico starting in 2013 — the same year it sold its remaining stake in Ally.

GM Financial vs. Ford Credit

General Motors beat Ford by decades in establishing a captive finance company, but today Ford Motor Credit is more profitable:
	FORD CREDIT		GM FINANCIAL
	Q3	9 mos	Q3	9 mos
Revenue	$3 billion	$8.9 billion	$3.5 billion	$10.4 billion
Pretax profit	$678 million	$2 billion	$498 million	$1.5 billion
Net income	$518 million	$1.7 billion	$441 million	$1.3 billion

Suryadevara said GM expects the financial arm to continue doing well despite challenges such as higher interest rates.

"We're, again, continuing to risk-manage this business, and this is going to be a strong contributor to earnings as we move forward," she said.

While the unit's financial results have improved — a net income of $441 million in the third quarter vs. $51.3 million eight years ago — GM Financial still has operational and reputation hurdles to clear. It ranked below average on the J.D. Power 2018 U.S. Dealer Financing Satisfaction Study, which followed as many as 2.5 million GM Financial customers affected by problems that followed a systemwide technology upgrade in late December.

From January through May, the lender stopped reporting customers' payment information to credit bureaus. The reporting halt saved some past-due customers from the consequences of late payments but customers applying for other types of loans were left in limbo.

The company quickly resolved several problems including customers who were overcharged or undercharged, but the effort was further complicated by intermittent phone outages.

"Frankly, we didn't have the capacity to grow to the size we expect to grow to in the coming years," Bob Beatty, executive vice president of customer experience, told Automotive News in January.