GMAC Officials Attribute Higher Auto Finance Results to Stronger U.S. Used-Vehicle Market, More
NEW YORK — In a bit of positive news, GMAC reported today that its auto finance business reported a pre-tax income of $346 million, compared with a pre-tax loss of $709 million a year ago.
"Results were driven primarily by improvement in the U.S. used-vehicle market, which resulted in increased proceeds on the sale of off-lease vehicles, favorable provisions on the retail balloon portfolios and improved loss severity levels," officials explained.
However, on an after-tax basis, the company posted a net loss of $727 million in the second quarter, compared with a net loss of $717 million a year ago.
The after-tax loss was primarily driven by a tax charge related to the conversion of GMAC to a corporation, officials noted.
Company executives said, "GMAC remains committed to providing appropriate levels of credit to support the U.S. auto industry and is now providing financing to Chrysler dealers and consumers."
In fact, GMAC reported it has now financed "approximately $320 million new Chrysler consumer originations through July 20, 2009. GMAC has also extended approximately $1 billion in interim wholesale financing to approximately 1,600 U.S. and Canadian dealers. The formal credit review process of interim-financed dealers has begun and is expected to be completed by mid-November."
The company went on to say that it did not experience significant credit losses related to the GM bankruptcy filing. General Motors Co., the new post-bankruptcy entity, holds the equity stake in GMAC and has also assumed the operating agreements between the companies.
Credit losses in the period climbed to 2.24 percent of managed retail contracts, versus 1.40 percent in the same quarter of last year, the company explained.
"The increase is due to higher loss frequency in Europe and North America, driven by economic weakness, the seasoning of the portfolio and a smaller asset base," officials said.
"Credit losses have declined, however, from the first quarter of 2009 level of 2.41 percent. Severity of losses has continued to improve from its peak in the fourth quarter of 2008," executives continued.
Meanwhile, delinquencies, or contracts more than 30 days past due, also increased to 3.44 percent in the quarter, compared with 2.39 percent in the same period of 2008.
"Delinquency trends have been negatively affected by higher unemployment and a smaller asset portfolio in North America and Europe," officials highlighted.
GMAC Financial Services
As a whole, the company reported a second-quarter after tax net loss of $3.9 billion, compared with a net loss of $2.5 billion in 2008.
Officials said results were negatively impacted by several factors:
—$1.2 billion tax charge related to the incorporation of GMAC
—$1.6 billion loss on the disposition of international mortgage assets and provision impairments and services on domestic non-bank mortgage assets.
—$607 million goodwill impairment of GMAC's U.S. consumer property and casualty insurance business related to a strategic review of operations.
—105 million of additional provision on resort finance assets.
Excluding these charges, GMAC's loss for the period was about $400 million.
Also impacting results were an increased loss provision at the mortgage operation related to continued credit deterioration and an original issue discount amortization expense related to GMAC's forth quarter 2008 debt exchange, officials noted.
"This was partially offset by improved results in the automotive finance business related to a strengthened used-vehicle market in North America," the company stated.
Losses related to the mortgage operation are consistent with analysis completed as a part of the Supervisory Capital Assessment Program, executives pointed out.
Talking about overall company results, Alvaro de Molina, GMAC chief executive officer, said, "GMAC's results in the quarter were dramatically affected by a series of strategic actions that produced a short-term negative impact to financial performance but are expected to lead to longer-term benefits.
"This is about gaining funding and operational flexibility, expanding our strengths and shedding legacy and non-strategic assets, allowing us to focus on the core automotive and mortgage origination and servicing business," he continued.
Liquidity and Capital
GMAC's consolidated cash and cash equivalents were $18.7 billion as of June 30, up from $13.3 billion at March 31, 2009.
Included in the consolidated cash and cash equivalents balance are $1.2 billion at Residential Capital LLC, $7.2 billion at Ally Bank (formerly GMAC Bank) and $865 million at the insurance business. The change in consolidated cash is primarily related to the investment by the U.S. Department of the Treasury.
Ally Bank's total assets were $42.5 billion at quarter-end, which included $11.9 billion of assets at the auto division and $30.6 billion of assets at the mortgage division. This compares to $36.4 billion of assets at March 31, 2009.
Deposits increased in the second quarter to $25.4 billion as of June 30, which included $14.5 billion of retail deposits, $8.7 billion of brokered deposits and $2.2 billion of other deposits, according to the company. This compares to $22.5 billion of deposits at March 31, 2009, composed of $11.0 billion of retail, $9.5 billion of brokered and $2.0 billion of other deposits.
GMAC's total equity at June 30 was $26.0 billion, up from $22.0 billion at March 31, 2009. In May 2009, GMAC received a $7.5 billion investment from the U.S. Treasury related to both the agreement to provide automotive financing for Chrysler dealers and customers and to the S-CAP results.
This investment contributed to strengthening GMAC's capital position. GMAC's preliminary second quarter Tier 1 capital ratio was 13.7 percent, and the Tier 1 common ratio was 6.1 percent, officials reported.
During the second quarter, GMAC issued $4.5 billion of guaranteed debt as part of the FDIC's Temporary Liquidity Guarantee Program. The offering further improved the company's liquidity profile, officials claimed.
Looking Ahead
While difficult economic conditions persist, GMAC said it is encouraged by positive trends such as improving origination levels in both the auto and mortgage segments. Additionally, GM and Chrysler have exited bankruptcy, which should lead to a more stable U.S. auto industry, officials added.
GMAC also said it recently launched an initiative to reduce costs and optimize its returns. The initiative targets decreasing expenses by approximately $1 billion on a run-rate basis by 2010. The plan to achieve this target includes streamlining the cost structure commensurate with business expectations, integrating operations, and rationalizing non-core and non-strategic activities.
"The profit optimization initiative represents a continuing step in GMAC's plan to transform the company and return to profitability," executives explained.
GMAC said it also continues to execute its five core strategies:
—Transition to and meet all bank holding company requirements.
—Strengthen liquidity and capital position by shifting largely to a deposit-funded institution.
—Build a world-class organization.
—Expand and diversify customer-focused revenue opportunities, with available funding driving originations.
—Drive returns by repositioning risk profile and maximizing efficiencies.
"The second quarter, like many prior quarters, produced a series of transformational actions, including creating a more flexible capital structure by incorporating GMAC, launching Ally Bank, restructuring the ownership of the company, and expanding our base of auto financing customers through the Chrysler agreement," said de Molina. "Our work is not over, but the foundation is being laid."