Behold The Power Of The Captive Finance Company

What the performance of these credit agencies says about the auto industry.

The recession couldn’t keep them down forever. Automakers sold approximately 8.2 million cars and trucks in the United States in the first six months of 2014 and industry analysts expect sales to top 16 million units for the first time since 2007. After July’s performance of 1.44 million sales, the seasonally adjusted annualized rate increased to 16.5 million.

That’s a lot of cars to finance.

In its most recent State of the Automotive Finance Market repot, credit reporting agency Experian breaks down performance from the first three months of 2014.

The big winner? Captive finance companies.

Captives increased their auto market share 52.5% year-over-year to reach 26.31%. By comparison, banks hold 34.83% of the market and credit unions hold 15.74%. What’s more, captive lenders hold 41.2% of their portfolio in super prime loans loans with a VantageScore of 740 or higher. At banks, 35% are super prime. For credit unions it’s 28.5%. Altogether, 82.3% of the loans with captive lenders have a VantageScore of 620 or higher. For banks and credit unions that’s 82.6% and 81.7%, respectively.

The positively trending overall performance of these financial companies echoes what’s happening in the auto industry. First, new car sales are up and leases are on the rise. According to Bloomberg, leases will comprise more than a quarter of retail auto sales by the end of 2014. That’s an all-time high. Captive lenders dominate auto leases, which offer lower payments and easier qualifications than a traditional loan. And according to Experian’s report, captive lenders dominate the new auto market, too six of the 10 top lenders are captive companies with Ford, Toyota, Honda, and Nissan Infiniti’s captive companies all ranking in the top five.

So are captive finance companies back? And what does that mean for credit unions?

A few quarters of sustained growth does not a comeback make, but it does signify shifts in buying and preferences. And while most captive companies are limited to a particular brand of auto, there’s a least one example of a captive company that operates more like a bank Ally Financial. You remember Ally Financial, the company the federal government bailed out in 2008 when it was named GMAC. In late December of that year, the Federal Reserve accepted its application to become a bank holding company. In early 2010, GMAC rebranded as Ally and posted a net profit of $1.075 billion for the fiscal year.

Captive companies aren’t rushing to become banks, but as auto loans currently make up 31.11% of the credit union industry balance sheet, it’s worth it to know what they’re doing.

August 8, 2014

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