GMAC's Results Show Declining Used SUV Values

GMAC (GMA) released its Q2 results today and the numbers weren't pretty as heavy lease losses, coupled with losses from the company's mortgage unit were a drag on earnings.

(From the FT): "A $716m vehicle lease writedown helped drive GMAC to a net second-quarter loss of $2.5bn, a sharp reversal from earnings of $293m a year earlier. Losses at ResCap, GMAC’s troubled mortgage-lending arm, climbed to $1.9bn from $254m a year earlier.

A glut of used SUVs and pick-up trucks has hammered auto-lease providers by forcing them to sell off-lease vehicles at prices well below contracted residual values, or the value of an asset after it has been depreciated.

Robert Hull, GMAC’s chief financial officer, said on Thursday that recoveries on SUV sales in June were only 75 per cent of expected values. Resale prices have often exceeded residual values in the past

GMAC, which has almost 1.5m leased vehicles on its books, said it aimed to contain future losses by cutting back on its US leasing business, halting lease incentives in Canada, and encouraging drivers to hold on to their vehicles after leases expire. Chrysler’s financing arm announced last week that it was pulling out of the leasing business."

GMAC, which has almost 1.5m leased vehicles on its books, said it aimed to contain future losses by cutting back on its US leasing business, halting lease incentives in Canada, and encouraging drivers to hold on to their vehicles after leases expire. Chrysler’s financing arm announced last week that it was pulling out of the leasing business."

If you want to understand the impact declining used SUV prices have had on GMAC, take a look at the chart below depicting the decline in used vehicle prices vs. their residual values: 

Graphic courtesy of the Financial Times

When you look at the graphic the role of SUVs in lease losses is pretty obvious as the resale value of off-lease GM SUVs has dropped by 21% since the spring, and if the trend continues it's likely to drop even further. Unless gas prices go down substantially it's not a stretch to say that SUV resale values could be done to 50% of the residual within the next 6-12 months.

The larger problem for GMAC (as well as Chrysler and Ford) is that even if they recently ended/cut back on leases, they're going to have older leases on the books for next couple of years. This means that their leasing losses will continue to increase over the coming years, as they have to sell recently leased SUVs into an environment where resale values will be even lower.

At present GMAC has $18 billion in SUV leases on the books, and if they're only able to recover 75% (or less) of the residual value at the time of sale you can imagine the size of the potential losses they're looking at. Hoping to encourage customers to stay in the cars they're leasing at the end of the lease, when they could just as easily trade the vehicle in and purchase an identical one for significantly less than the residual won't be an effective way to mitigate their losses. I.e. GMAC shouldn't expect much from a loss mitigation strategy that hinges on talking consumers into bad decisions.

You can read the FT's coverage of GMAC here , and the WSJ's coverage here.

Sources:

The Financial Times: "GMAC results fall as US dumps the SUV" -- Bernard Simon, July 31, 2008.

The Wall Street Journal: "Burdened by Auto Leases, GMAC Posts Quarterly Loss of $2.48 Billion" -- Aparajita Saha-Bubna, July 31, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[simplesimon:]

Before we think "oh poor gmac-so undeserving of this precipitous shift in market trends; losing the shirts off their backs, and their pants yanked down to their bare ,pale corpulent asses also , "through no fault of their own". One only has to go to ripoffreport.com and read the scurilous attacks on gmac over what appears to be a systematic, deep structure policy of ruthless hand over fist repo greed. They discovered, thanks to the laws their lobbyists got put in place via the politicians in their pockets, the perfect legal right to repo a car with only the second payment past due...sell to carmax and autoadvantage for 50% its value and legally bill the victim of the repo the remaining amount owed!! They turned this ruthless greed and arrogant disregard to their full, and obscenely lucrative advantage. Here is a company that made the executive decision that business integrity had nothing to do with anything. ( I think a golden parchute is well deserved here, don't you, fellows?) Now they are going down like the Titanic they deserve to be...and there seems to be no rescue ships scurrying to their aid....Aw gee whiz. "When sorrows like sea billows roll..." Fellows... I hear they're hiring at dunking donuts....glub, glub

2008 Aug 01 09:01 AM

[notsosmart:]

they deserve what they are getting. too bad the top guys still manage to come out unscathed.their million dollar parachutes will build on their legacy fortunes.if possible dont lease,buy used & hold on to your vehicle.its the only way to beat the unethical,greedy crowd.

2008 Aug 01 03:35 PM

[ddavid:]

In case the posters have forgotten - Capitalism drives greed, and Greed drives capitalism. People are just as greedy as corporations. I do agree CEO's make way too much money, but that is the fault of the Board and Shareholders. If you got a $100 dollar an hour raise, I can just see you jumping with joy but never giving a second thought whether you deserve it. Society makes their own bed, so sleep in it or choose communism over capitalism. Nice to talk about greed of others but your just as guilty by allowing it to happen.

2008 Oct 18 07:30 AM