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GM Financial sees more "headwinds" from residual values

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GM Financial has been pulling back on leasing, but it still expects to be negatively impacted by falling used car prices for the remainder of the year, company executives said Tuesday.

Heading into the fourth quarter, the captive finance arm of General Motors will face “headwinds” as residual values of cars coming off lease fall by up to 7%, company executives warned on a conference call discussing third quarter financial results.

Softer car prices could also reduce recoveries on defaulted auto loans, but executives see the biggest impact on the leasing business. Lessors set lease rates based on what they expect the value of a vehicle to be at the end of the term. If the resale value is too low, the lease is not profitable.

An increase in leasing over the past several years has contributed to the problem as the large volume of cars coming off lease put additional downward pressure on used prices. For this reason, GMF said during its previous earnings call that it would originate fewer leases in order to limit its exposure.

In addition to auto loans and leases, GM Financial also securitizes lines of credit it extends to dealerships to finance their inventory. On the conference call, chief financial officer Chuck Stevens said the company is on track to reduce its dealer inventory supply levels to about 70 days - below previous company forecasts - by the end of the year. This could benefit its floorplan securitizations by boosting dealer payback rates.

“We expect to have roughly 80-day supply of trucks and SUVs which is normal level for us; an appropriate of crossovers, 60 to 70 days, and somewhere in the zip code of 50 days of passenger cars,” Stevens said.

Stevens also said that the auto loan and lease securitizations GM Financial brings to market in 2018 will have a higher concentration of trucks, SUVs and crossover vehicles and fewer of the less popular autos, a mix he described as “better balanced.”

GM Financial recorded a record $3.2 billion in third quarter sales and revenues and $320 million in net income as it expanded its share of financing vehicle sales for with parent General Motors. The finance company’s revenue was up 30% from the third-quarter of 2016 ($2.36 billion), and its earnings were up 60% from $193 million year-over-year. For 2017 to date, GMF’s profits of $895 million are up 40% from the $600 million generated through September 2016.

The gains are the result of GM Financial’s lower capital expenditures this quarter as well as a further upswing in its captive finance business with growing numbers of GM dealers, many of which had maintained ties to GM’s former GMAC affiliate (now Ally Financial). GMF’s penetration has grown to 43% of overall GM sales financings in 2017, an increase from 37% in the third quarter of last year.

GMF’s prowess did little to offset the quarterly loss of $2.9 billion for GM, which it taking its bottom-line lumps for pullbacks in production and global market presence.

GM Financial, which maintains a steady liquidity of $31.4 billion, has issued $10.2 billion in securitizations involving receivables from prime and subprime auto loans, leases, and dealer floorplan financing.

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Auto ABS Auto industry Auto leasing Securitization Floorplan ABS General Motors