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Peers' captive success supports Chrysler's interest in finance function

If Fiat Chrysler Automobiles NV had any remaining misgivings about the idea of having its own U.S. captive finance capability, the third-quarter financial results for the finance arms of two of its rivals may have put them to rest.

The automaker confirmed in June that it intends to buy or build a captive finance company after relying on third-party partnerships, previously with Ally Financial Inc. and since May 2013 with Santander Consumer USA Holdings Inc., to provide financing to Chrysler dealers and their customers. It holds the option to acquire the equity in the entity that conducts business under the Chrysler Capital name.

"From a captive finco perspective, I'm a big advocate of it for many reasons and you've seen some of the contributions it made to our peers." said Michael Manley, who was named FCA's CEO and COO of the NAFTA region in July, during an Oct. 30 conference call. Manley confirmed that his company is continuing discussions with Santander Consumer. "We'll ... see where they end up," he added.

Against that backdrop, Ford Motor Credit Co. LLC and General Motors Financial Co. Inc. both produced historically favorable results in the third quarter.

Ford Motor Co. said that its captive finance unit delivered its strongest quarter in seven years with earnings before taxes rising to $678 million for the three months ended Sept. 30 from $600 million in the year-earlier period. The automaker cited favorable lease residual performance as used car auction values moved higher by about 5% year over year. Ford Credit also benefited from favorable trends in volume and business mix.

"We're very encouraged that U.S. consumer credit metrics remain healthy," said Ford CFO Robert Shanks during an Oct. 24 call. "And, in addition, Ford Credit's balance sheet remains strong, with managed leverage remaining within the targeted range."

General Motors Co., meanwhile, reported "record" performance at GM Financial, the finance company formerly known as AmeriCredit Corp. that the automaker acquired in October 2010 and transitioned over time into a full-scale captive. GM CFO Dhivya Suryadevara said during an Oct. 31 call that GM Financial performed strongly on the top and bottom lines of its income statement, with "all-time quarterly record revenue" of $3.52 billion and "record" earnings from continuing operations before income taxes of $498 million. Its revenues and adjusted pretax operating earnings in the third quarter of 2017 were $3.16 billion and $310 million, respectively. The company anticipates "significant year-over-year profit growth" from GM Financial in the fourth quarter, Suryadevara said.

The strong actual and expected financial performance has led GM to initiate an ongoing upstream dividend from GM Financial. Suryadevara said that the $375 million dividend that GM anticipates from GM Financial in the fourth quarter will be "well ahead of our original plan." Those dividends, Suryadevara said, give GM the opportunity to strengthen its long-term cash generation capability and narrow the gap between earnings and free cash flow on an ongoing basis.

"We continue to increase the penetration within [GM Financial] as well as just grow the overall size of the balance sheet [and] you're seeing those results come through," Suryadevara said. "The other point worth highlighting are credit losses. They remain within range and so we're constructive there as well. And residual prices, as you're well aware, they remain constructive also."

GM Financial President and CEO Daniel Berce said that his company had reached a penetration rate of 50% of GM's retail sales in the third quarter. The increase from a rate of 35.6% in the year-ago quarter and 45.4% in the second quarter of 2018 helped drive significant growth in origination volume in its U.S. retail segment. He confirmed that the company's U.S. disposition proceeds on off-lease vehicles were favorable relative to estimates at the time of origination.

"The used-car market has well outperformed our expectations going into the year," Berce said during a separate Oct. 31 call.

Santander Consumer, for its part, saw material improvement in its Chrysler penetration rate during the third quarter as it rose to an average of 31% from 21% in the year-earlier period. CFO Juan Carlos Alvarez de Soto, speaking during an Oct. 31 call, cited "good momentum" with some of FCA's largest dealers for the improvement.

Company officials declined to comment on the status of discussions with FCA during the call, but President and CEO Scott Powell said that he remains optimistic about Santander Consumer's future regardless of what comes of that exercise.

"They are going to be an important part of our world for a long time to come in some way, shape, or form.," Powell said. "And then outside of that, our strength in the non-Chrysler part of our business is very much focused on nonprime ... and we think we have a whole range of opportunities."