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Fitch: Growth & Profitability Under Pressure for U.S. Captive Finance Cos.

June 15, 2017, 07:08 AM
Filed Under: Captive Finance

Captive finance companies are likely to face continued pressure on profitability due to rising credit losses, declining residual values and higher funding costs, according to a review of U.S. Captive Finance Companies from Fitch Ratings. In addition, after a solid 2016, portfolio growth is likely to moderate over the near term, particularly for consumer-oriented companies, as U.S. auto sales are expected to decline. Average portfolio growth for the captives in this report was 4.5% in 2016, up slightly from 3.9% in 2015.

Average pretax earnings margins were 23% in 2016, down from 29% in the prior year, due primarily to weakening asset quality, declines in used vehicle prices, and competitive pressure on asset yields.

"Weaker credit performance is likely to continue in 2017with both charge-offs and delinquencies climbing from historically low levels as a result of portfolio seasoning and lower recovery rates on defaulted auto loans," said Michael Taiano, Director, Fitch Ratings.

Overall credit quality for consumer and commercial captives in 2016 continued to weaken, which was consistent with Fitch's expectations following post-crisis lows that were unsustainable. Average net loss rates for the captives included in this report increased meaningfully, to 0.82% in 2016 from 0.61% in 2015. The increase in net credit losses was most pronounced within the auto captive segment.

Leverage has also been on the rise for several captives. Average leverage for the group ticked up slightly at YE16 to 7.5x versus 7.4x in 2015, with many captives currently at or near five-year averages. Captive leverage, as measured by debt to tangible equity, is typically higher relative to many stand-alone finance companies in part due to explicit or implicit parent support. The willingness of parent companies to inject capital and/or reduce/forgo dividends to support asset growth has limited further increases in leverage. Fitch expects U.S. captive portfolio growth to moderate in 2017, which should limit further increases in leverage for most, absent material credit deterioration.

"The slight increase in leverage reflects stronger portfolio growth relative to more moderate earnings growth," added Taiano.

With the exception of Caterpillar Financial Services Corporation's (CFSC), whose Rating Outlook was revised to Negative from Stable on Dec. 8, 2016, the Rating Outlooks for all Fitch-rated U.S. captive finance companies (captives) are Stable following the revision of General Motors Financial's (GMF) Rating Outlook to Stable from Positive in conjunction with the ratings upgrade to 'BBB' from 'BBB-' on June 8, 2017. All Fitch-rated U.S. captives are equalized with their corporate parents, reflecting Fitch's view that they are core to the parents' businesses. All Fitch-rated U.S. captives are equalized with their corporate parents, reflecting Fitch's' view that they are core to the parents' businesses.

The report, "U.S. Captive Finance Companies: 2016 Review," is available at or by clicking on the link.

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