Low rates, growing role benefit GM Financial

GM Financial continued to benefit from strong used-vehicle values and low interest rates in the first quarter, while assuming a broader role with General Motors. GM Financial took over the F&I product division from GM last year and plans to launch Cadillac Financial this month.

Used-vehicle pricing and low interest rates for borrowers helped GM's captive boost net income 9.6 percent from a year earlier to $962 million, even as loan and lease originations declined because of low vehicle supply.

GM Financial CEO Dan Berce said the captive will monitor used-car values and credit this year as economic trends, such as inflation and rising interest rates, come into play.

"The labor market is good, but we are in a fluid situation with inflation and rising interest rates," Berce said. "That's something we are really attuned to — economic developments."

Berce spoke with Staff Reporter Hannah Lutz last month. Here are edited excerpts.

Q: Used-vehicle pricing was lower in the first quarter than in the fourth quarter of 2021. What do you expect for used-car pricing going forward?

A: Used-car pricing is still relatively firm. It dipped in first 10 weeks of 2022, and it has firmed a bit since. That being said, we sold 99 percent of our vehicles at contract residual in the first quarter. Contract residual is typically about 10 to 15 percent below market prices. We would consider that 10 to 15 percent a buffer, so used-car prices could decrease that much before it started to affect our results.

GM Financial expects pretax earnings of $3.5 billion to $4 billion this year, a decrease from $5 billion in 2021. What's driving the expected decline?

Really two significant items: residuals and credit.

On the credit side, we're building in for the rest of the year some normalization of credit as well as normalization of recovery rates. Both of those effects tapered all through '22.

On the residuals side, we are going to have fewer lease terminations for the next nine months than we had annualized in first three months, so it's a volume effect. Second, because of higher used-car values, we have slowed depreciation on our lease portfolio and that results in higher book values compared to if you had depreciated faster.

Even if we sell the vehicles at the exact same price going forward the next nine months, the book value will be higher, so thus the gain will be lower per vehicle.

The third is we especially slowed depreciation on maturities in '22 and in the first part of '23. We didn't make as great a change in later '23 and '24 maturities. So every quarter that goes by, the depreciation impact will be less.

The residuals are set when we sell the car, but then every quarter we mark the residuals to market. If we have a car that we sold a year ago, and the contract residual is 100, maybe that car is worth 110 now or 120. So we're depreciating only to 110 or 120, not to 100.

For the near-term maturities, we are taking that full mark of 110 or 120 in my example, but for maturities in 2024, we are depreciating to 100. So there is more depreciation.

[The residual effect is] three-part. It's lower volume, lower gain per vehicle and decreasing impact depreciation slowdown.

GM Financial did not pay a dividend to GM in the first quarter. How much do you expect to pay for the full year?

It's going to be more than our original expectation for 2021, which was $1.2 billion.

First-quarter loan delinquencies reached 2.2 percent, up slightly from 1.9 percent a year earlier. Are you concerned about rising delinquency rates?

We think our portfolio is well situated. We are about 70 percent prime, and about 70 percent of the portfolio was new-car financing. Even though transaction prices have been higher, especially over the last 12 to 18 months, our loan-to-value [ratios] on new have been stable, and our loan-to-value [ratios] on used have actually been less.

That's primarily because the consumers have more money to make cash down payments and more trade-in value with high used-car prices. The consumer has basically been able to offset higher transaction prices with a higher down payment to keep a similar loan-to-value [ratio]. The prime consumer typically has enough savings, a prime-enough balance sheet, to withstand inflation or higher payments.

How is the Cadillac Financial launch going?

We plan to roll it out the first week in May. We trained… Cadillac Financial [customer experience] experts. We have all of our policies and protocols in place. We have trained people in the field to be Cadillac Financial experts for dealers. We're all ready to go.

Why did you bring the F&I product team to GM Financial from GM last year?

The products were housed within GM for several years. Just as an enterprise, we decided that GM Financial has great touch points into the dealer and that's where those products are sold and that it may make more sense going forward to have it housed within GMF. That's similar to decisions made recently about OnStar insurance, where again GMF is the F&I expert within the enterprise and so anything that is finance and insurance, it just makes sense to have it housed here.