User 183867

Harley Davidson Financing Leading the Pack

User, you are getting a little didactic. I never said they could not suffer losses in their lending business. I just questioned whether foreclosing on loans and auctioning off used motorcycles was a good thing or not for HOG. I suspect it is not.

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So they are not supposed to foreclose on loans? This is like saying a car manufacturer should not incur steel costs, labor costs, or costs for tires. It's a fact of life; loans go bad and you have to repossess. The idea is to look at the loss experience via frequency and severity and compare that against net interest income + fee income - noninterest expenses, look at that versus asset and capital, and make your judgment from there. Just saying "they take losses, ergo it's bad" is a pointless argument, if that's what you're trying to say.

Harley Davidson Financing Leading the Pack

But doesn't HOG lose on the lost financing contract with the original buyer? So they sell for 28% over what they sell to the dealer, but they lose their loan and they have to pay all costs involved in foreclosing on a loan.

I doubt HOG would call this a profit center. In the real estate context, they avoid foreclosures in part because of their expense.

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Credit losses are part and parcel of the lending business, a business which is damned profitable for Harley-Davidson. Credit losses are an expense like any other. Those companies that manage them best, which is what a high recovery value on recovered collateral means, relative to revenues win. Saying H-D can't have losses is like saying a business can't incur expenses; in other words, nonsense. H-D incurs low frequency of losses and low severity once it does, which are two good reasons why its pretax pre-provision ROA is so high and why the after-tax ROA and ROE are so attractive. In addition, the asset integrity and the capital integrity of the company's balance sheet is high because of the low severity of its loan losses. These evince adequate reserves, the quality of the balance sheet, and the quality of the income statement.

Harley Davidson Financing Leading the Pack

Mallarde,
You asked about the quality of the on-balance sheet portfolio, so I gave you the answer because you apparently cannot access or interpret the data yourself. Sorry you don't like the answer, but the implication of your question about retaining the crap they couldn't sell is without merit.

How discretionary are their charge-offs? Why don't you figure out how to analyze delinquency roll rates, frequency of loss, severity of loss, and reserving and then get back to us on that.

Harley Davidson Financing Leading the Pack

For those with the patience to power through the above article, here is where the smoke and mirrors comes in:

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Uh, net charge-offs ran at 0.6% of the on-balance sheet portfolio and loan loss provisions ran at 226% of net charge-offs. These are annualized numbers, so dividend by four for the quarterly rate. Loan loss allowances at the end of the quarter were equal to 157% of the annualized net charge-off rate. Given these numbers (look it up in the Q), I wonder about what kind of smoke and mirrors Mallarde is using.