General Motors Company (NYSE:GM)
“Behind the Charts” Conference Call
June 23, 2016 11:00 a.m. ET
Chris Choate - EVP and CFO, GM Financial
Steve Jones - VP, Investor Relations, GM Financial
Susan Sheffield - EVP and Treasurer, GM Financial
Connie Coffey - EVP, Corporate Controller, and Chief Accounting Officer, GM Financial
Brian Johnson - Barclays Capital
Samik Chatterjee - JPMorgan
Colin Langan - UBS
Mike Levin - Deutsche Bank
Good morning. My name is Lois and I will be your conference facilitator today. At this time I would like to welcome everyone to the GM and GM Financial ‘Behind the Charts’ Presentation. This call is being recorded. All lines have been placed on mute to prevent any background noise. At the management’s remarks, there will be a question and answer period. I would now like to turn the conference over to Steve Jones, Vice President of Investor Relations at GM Financial. Please go ahead.
Thank you, Lois. Good morning and thank you for joining us today for the ‘Behind the Charts’ presentation with GM Financial. Our featured speaker today is Chris Choate, Chief Financial Officer at GM Financial. Joining Chris for Q&A will be Susan Sheffield, Executive Vice President and Treasurer, and Connie Coffey, Executive Vice President, Corporate Controller, and Chief Accounting Officer.
Before we proceed, I must remind everyone that the topics we will discuss during this presentation will include forward-looking statements which are the company's current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks and uncertainties that could cause actual results to differ significantly from historical results, or from those anticipated by us. The most significant of these risks are detailed from time to time in the company's filings and reports with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2015. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our results may vary materially.
I will now turn the call over to Chris Choate. Chris?
Thank you, Steve, and welcome everyone this morning. We appreciate your participation. I will first touch briefly on the agenda. I am going to do a brief overview of GM, hit some key business drivers and then add some additional information before the Q&A. The purposes is to provide better insight into GM Financial as well as hopefully address some topics that we see frequently asked both at GMF and at GM.
So beginning with an overview of GM Financial, on Chart 5. GM Financial is General Motors’ global captive finance company. We have earning assets of $64 billion with operations in 20 countries, serving 16,000 dealers worldwide. And our global footprint covers 85% of GM's worldwide sales. You see from the map of the countries in which we operate, our North American segment which includes the U.S. and Canada, and our international segment which I'll address which countries those cover in a bit.
As GM has pointed out in their communications over the last year or more, GM Financial is a very strategic business. We are very well positioned for profitable growth and contribution to overall enterprise value, and GM Financial’s overall objective is to support GM vehicle sales while achieving appropriate risk-adjusted returns.
Turning to Chart 6, our organizational structure. GMF is consolidated with GM. Our results are adjusted in GM's financial statements to eliminate the effect of intercompany transactions. These eliminations may result in reporting differences between GM and GMF. At GMF, we do file standalone 10-Ks and 10-Qs with the SEC and we have two reporting segments: North America, again which I mentioned is U.S. and Canada, and our International segment which covers 12 countries in Europe, five countries in Latin America and our China joint venture. Really, in our international segment there are four primary countries of significance in Europe, that includes Germany and the U.K. and Latin America is Brazil and Mexico.
A couple of points on our China joint venture. We do own a 35% equity interest in the SAIC-GMAC joint venture in China. It is reported as equity income on the income statement and equity in net assets of non-consolidated affiliates on the balance sheet. In other words, we do not consolidate the operations of this JV into our GMF financials. This JV gives us an interest in the largest finance company and the largest auto market in the world. It generated $116 million and $36 million in equity income for the calendar year 2015 and first quarter of 2016 respectively, and it currently has earning assets north of $10 billion.
Turning to Chart 7. It's really a chart that describes how the GM Financial fits into General Motors' strategic priorities. Our goal is to help drive vehicle sales by offering attractive products and services with efficient delivery, very focused on enhancing customer experience and loyalty, integrating with GM initiatives to enrich customer experience, and increase retention and loyalty, support GM dealers and customers by providing financing support across economic cycles, and as I mentioned contribute to enterprise profitability. We do expect to be able to double our pre-tax income from our 2014 level which was approximately $800 million as our full captive penetration levels are achieved over time.
Chart 8 provides a bit of a historical look at GM Financial’s evolution. Our evolution as a full captive is substantially complete and we are entering a full captive expansion phase. I won’t touch on all of the activities and achievements across the period from 2010 when GM first acquired GM Financial, but we have moved into leasing into Canada, into a floor-plan product. A real key activity or a key event for GM Financial was the international acquisitions that began occurring across 2013 and were concluded with the China acquisition in early 2015. And really towards the back end of this timeline, we began to expand our presence in lease and prime lending as well, moving to full exclusivity on lease and prime lending in 2015 and early 2016.
Looking forward we're looking to increase our share of prime loan in North America, continue to grow our floor-plan strategically, expand our customer relationship management to enhance loyalty and retention. In our international markets where we really already have a dominant share, we're looking to hold that share and potentially expand product offerings in geographic locations over time.
Turning to Chart 9. Our penetration statistics both for North America and in our international operations. And what this shows is the last several March quarters of our penetration levels of GM's retail sales chains and the wholesale dealer penetration which is floor plan. So our penetration in North America, GM's retail sales is up over the last couple of years from 7% to 36% that has to do a lot with the increased leasing that we do for GM in North America. Our floor-plan penetration is up from 6% to 13.5%.
The other line here is GM as a percent of GMF’s retail originations, so the flow of business that comes into GM Financial that's represented by GM in North America has moved from 50 or so percent up to almost 90% over the last couple of years. In North America we still do -- a decent percentage of our business is used vehicle financing, not necessarily associated with GM dealers, which is a very profitable business for us to continue engaging in.
In our international business, again we have really what is more like a full captive penetration presence. So our penetration in GM’s retail sales in the international chain is in the mid 40%, up from a couple of years ago following the acquisition. Our wholesale dealer penetration is almost 100% as we really are fundamentally the inventory financing partner for GM and GM dealers in our international operations. And the percentage of our business that's represented by GM internationally is 86%, pretty flat over this time period. We do a small amount of used vehicle financing particularly in the U.K.
And our China JV penetration really has been moving steadily up since the acquisition, now at 23%, up from 16% a year ago. And something that we expect will continue to move up over time as that society and culture adapts to more financing products as a way to purchase vehicles.
Turning to Chart 10. We have very strong operating results. There are several metrics on this page. Pretax income $815 million in ’14 up to $840 million in 2015 and we're on track to slightly eclipse that $837 million from last year. We’ve generally guided that we would be somewhere in or around $900 million for 2016.
Annualized net credit losses have been very stable over the last couple of years. First quarter of 2016, 1.9% for all periods reflected. In North America where we still have a decent composition of our portfolio represented by sub prime, our annualized credit losses tend to run in the mid 2% to upper 2% range. Our international losses tend to run less than 1% because it is almost exclusively a prime portfolio.
Origination volume here also has grown $21 billion to $38 billion year over year, $11 billion for the first quarter of 2016. We certainly would expect to see our full year originations in 2016 be well north of the $38 billion from last year. And our annualized operating expense ratio, which is important is to view how efficiently the business is being operated, has come down nicely. We expect to see that continue to come down inside of 2% as we build out the earning assets and are able to leverage our infrastructure more efficiently.
Moving on to the balance sheet on Chart 11. Ending earning assets continued to move up nicely from $41 billion to currently $64 billion, liquidity at $13 billion as of March quarter end. We're looking on liquidity to have roughly six months forward of available liquidity in the event we were unable to access the funding markets for any reason.
Tangible net worth at $7.2 billion is also up steadily over the last couple of years. As the first bullet point notes tangible net worth is net of accumulated losses on foreign exchange translations which is around $900 million at March 31, that certainly has an impact on our leverage ratio than on the bottom right, because tangible net worth is the denominator in our leverage ratio, our leverage ratio currently at 8.8 times is a measurement of earning assets divided by tangible net worth, that’s calculated consistent with the support agreement which I'll have more to describe in a moment.
More detail on our earning assets composition on Chart 12. As the slide notes, our earning assets composition is shifting towards a full captive state. Lot of shifts occurring here all of which really are positive for overall asset quality, captive penetration and earnings stability over time. The percent of our earning assets related to financing GM new vehicles is now at 84%, up from 77% a year ago. That will continue to move up over time as we do more prime lending and leasing for GM in American markets.
We're also seeing a mix shift towards higher credit quality assets with the growth in prime loan and leasing in North America. The bullet point here notes that 17% of our earning assets at March 31 ’16 were sub-prime versus 26% a year ago. That's a migration that we continue to expect to continue also. And then our earning asset expansion is shifting towards North America which is more aligned with GM’s geographic sales footprint.
Chart 13, our funding platform. Here again a positive shift in the direction of unsecured debt which increases our unencumbered assets. Our strategy is to fund locally with flexibility to issue globally to support North American growth. We have multiple securitization platforms. Currently we have three securitization platforms in the U.S., two European platforms, all segregated by asset type and geography as I noted. We have a global senior notes platform that is a frequent issuer in the U.S., Canada and Europe.
We're well supported by 36 banks globally to provide us with almost $25 billion in credit facilities. As I've noted, our unsecured mix is moving in the direction of a 50:50 split which we expect to accomplish within the next couple of years. And again very active issuance profile, year to date we've issued $5.8 billion in public secured or securitization notes, and north of $6 billion in senior nodes. And you can see where we expect those to end for the year $10 billion to $13 billion in senior nodes and $11 billion to $14 billion in securitizations.
Chart 14, we and GM are very committed to investment grade. We are targeting -- GM is targeting performance consistent with a single A ratings criteria. You can see in the table on chart 14, the ratings by rating agency, DBRS, Fitch, Moody's and S&P. You can see from the table that we are lagging an investment grade rating from Moody's which we’re working very actively on to have that move up.
We did put in place couple years back a support agreement between GM and GMF which solidifies our position as a core component of GM's business and it strengthens our capability to support GM’s strategy. The support agreement, very common between manufacturers and finance companies, doesn't require that GM own a 100% of our shares as long as we have debt securities outstanding. It establishes secured leverage limits based on net earning assets and also provide funding support for GMF if needed.
I noted our current leverage ratio of 8.8 times currently, the limit in the support agreement currently is 9.5, so we are inside of that leverage limit currently. The next step up would take the leverage limit to 11.5 times when our earning assets exceed $75 billion. If you recall we're currently at $64 billion. And then ultimately when we get north of $100 billion earning assets, our leverage limit would be 12 times.
We do expect there could be some temporary moving over that leverage limit in 2016. We don't expect to need to borrow the support bringing that back down because we would expect to be back in full compliance with that by the end of the year. And then as this note points out, the achievement of an investment grade rating is absolutely critical for our captive strategy execution because of the improvement in cost of funds and access to funding.
I’ll now turn into the key business drivers, beginning on Chart 16. This just really lists the key business drivers at a very frankly simplistic level for our business. Obviously our earnings are driven by the size of our portfolio and the yield that we achieve on that portfolio, which has a lot to do with market conditions, GM market share, really the macroeconomic environment as well.
Funding costs is really what we pay on outstanding debt and fees associated with our unsecured bonds, our securitization funding and our credit facilities. Credit performance is obviously the underlying credit characteristics of the portfolio as those may be affected from time to time by economic conditions, servicing execution certainly has a role here as well.
Residual performance, really completely focused on the value of used vehicles in the market and then again I’ve noted our operating expenses as we become larger and more efficient and able to leverage our infrastructure as the portfolio size increases.
Pretty simple calculation on the bottom of the chart 16. Pretax return on assets for GMF in 2015 was 1.7%, simply dividing our earnings before taxes by our average earning assets. Our ROA really varies by product level across all the different products we offer. It's obviously much more robust on sub prime than it is on prime or floor plan which has fairly narrow margins. But that is all very commensurate with the risk of the different products.
Now I am going to go through some of the income statement and balance sheet categories and just make a few brief comments on kind of what the income line statements and balance sheet statements have in them, focus maybe briefly on some of the drivers.
So beginning on Chart 18, on the income statement. Finance charge and leased vehicle income again is obviously driven by the size and the yield. It's impacted by what origination mix and credit mix we are targeting. It also includes the impact of loan subvention, including frankly how much loan subvention GM is directing into the market to support vehicle sales.
Our operating expenses are primarily headcount related. We don't have a significant amount of infrastructure, fixed investments we need to make outside of our IT area. As a relative percentage again, we expect to see this to moderate as economies of scale are realized. And leased vehicle expense is primarily depreciation on leased vehicles, offset by the accretion of lease subvention. Almost all leasing is subvented one form or another. So the benefit of that subvention effectively offset depreciation and runs through leased vehicle expense.
Of note here, we do mark our lease portfolio on a quarterly basis to try to capture any changes in the value of the underlying collateral so that we can effectively increase or decrease depreciation as necessary, so that we don't get caught with surprise and an impairment at some point in time down the road.
Continuing with the income statement on Chart 19. Really the key item here is our allowance – excuse me, our provision for loan losses. The provision is really a byproduct of the allowance which is on the balance sheet obviously, it’s essentially a plug and reflects the expense necessary to maintain the allowance at levels adequate to cover probable losses. Our interest expense, again interest rate, fees, so on associated with our debt issuances and credit facilities, our ratings level obviously drives the amount of interest rate that we are able to issue our unsecured debt at. And then finally on the P&L, our equity income reflects earnings on our 35% equity interest in the China JV.
Turning to the balance sheet for GM Financial, beginning on Chart 21. Really the most critical estimate or item on our balance sheet is our allowance for loan losses. We do net that against our finance receivables. We have a lot of detail in our 10-Ks and Qs on how we determine that allowance for loan losses. We use a combination of forecasting methodologies that incorporate credit mix, volume and credit environment as well obviously as what we expect to see on recovery values on repossessed collateral. The allowance for loan losses is typically described and analyzed and discussed as a percentage of the finance receivables which again we do disclose in our periodic filings. Currently our allowance for loan losses is in a mid 2% range, we expect to see that come down as our credit mix migrates towards prime lending over time.
Leased vehicles, here again this reflects the amortized cost of the leased vehicles, which basically means the original cash cost less accumulated depreciation over time, all of that is net of subvention support payments. And then the related party receivables are cash payments due from GM where -- we originated a contract that had a subvention payment due and it just hadn’t been made to us actually at quarter end.
Continuing with the balance sheet on Chart 22. Credit facilities, secured debt and unsecured debt, our warehouse credit facilities, impacted by how much debt we need to support growth. Related party payables, these are primarily for commercial finance receivables originated but not yet funded, kind of the inverse of the subvention receivables on the floor-plan side, and then here you see what I described earlier the accumulated other comprehensive income which includes foreign currency translation related to the strong dollar compared to other currencies, and does affect our calculation of tangible net worth and ultimately our leverage ratio.
Chart 23, a few bullet points related to subvention. We do receive subvention payments from GM at the point of origination. GM utilizes subvention as everyone on this call knows to enhance customer affordability. Payments are recognized as incentive spend by GM in the quarter in which they are made to us.
Subvention programs include two types: rate support for both loan and lease, and lease residual enhancement. For rate support this provides the customer with a lower interest rate on their loan or a lower money factor on their lease. The calculation of this subvention payment is based on the discounted value of the difference in the monthly payment utilizing the subvented and non-subvented rate and again we do collect that upfront at the point of loan and lease originations.
For loans, that amount is accreted into finance charge income over the life of the loan and for leases, the rate support results in lower depreciation over the life of the lease. Almost for all leases, we do receive some type of lease residual enhancement where GM increases the contracted residual value above ALG value at origination. This subvention payment is based on the difference between those two values. ALG as many of you probably know is a recognized industry leader in setting residual values which incorporate macro, industry and brand factors. And again that residual enhancement payment results in lower leased depreciation vehicle – leased depreciation over the life of the loan.
Chart 24 discusses our retail loan credit performance, already discussed it on a consolidated basis, this breaks out the credit performance between North America and International operations. The credit metrics reflect the credit quality of the underlying portfolio. North America has been favorably impacted by growth in prime originations. So loss rate – annualized loss rates in North America are down a bit year over year from 2.6% to 2.5%. There's a little bit of seasonality in credit losses particularly in sub prime where they are better in the spring and summer months, lightly weaker in the fall and winter months. And again our international operations, loss performance remains stable consistent with a predominantly prime portfolio.
Chart 25 focuses on the subprime industry, originations and losses. The table on the left -- the chart on the left shows total quarterly industry loan origination by credit here 680 plus being generally viewed as a prime credit, 679 viewed as a near prime or mid prime credit, and less than 620 being a subprime credit. And what the table shows is that the growth in auto -- industry auto loan originations over the last several years coming out of the economic cycle has been driven by increases in prime lending. Sub-prime lending coming out of the economic cycle had come close to that has yet to reach the level that they did prior to the economic cycle. That is really arguing against the concept of a subprime credit bubble existing in the market.
The monthly net credit losses on the right hand compares – these are comparisons of subprime securitizers of which GMF again is very active. These are FICOs below 620 and what this table shows is that GMF securitization data for sub prime is really outperforming our peer group. One thing that we wanted to note on this chart or call out as well is that since the acquisition of GMF by GM in September of 2010, almost six years ago, the average GMF’s prime U.S. loan term has remained stable at approximately 70 months – excuse me, October 1.
Residual value on Chart 26. GM and GMF, really the supporting of residual values is a very joint effort between GM and GMF. GM’s actions to protect residual values include, and this has been much discussed over the last several months and quarters, that the managing of fleet sales, actively managing new vehicle inventory, and maintaining disciplined incentive spending, all those have a downstream impact on residual values that GMF has to wrestle with as vehicles come off lease.
GMF has developed a robust end of term remarketing process. We have a private label online wholesale marketplace, GMF DealerSource provides a single source online for dealers to come and purchase pre-owned GM vehicles which are off-lease, rental vehicles and GM company cars. It's designed to support the GM dealer base while also maximizing resale values. The more vehicles that we can dispose higher up the food chain to GM dealers either at the local, regional or even national level keep those vehicles out of the wholesale auction markets where they will bring less value and therefore have a detrimental effect on residual value.
We're also working jointly through the use or developing alternative channels for off-lease, rental and company vehicles. One example of this is the GM factory pre-owned collection which basically allows consumer access to a subset of the vehicles that are available on the GMF DealerSource, so it’s allowing consumers to come into that market and further support residual values through bidding on off-lease and rental vehicles.
Chart 27, expected growth. This chart is really an exact lift out of presentations that GM has made previously. It shows GMF’s expected build and ending earning assets, really uses 2014 as kind of a baseline for what we collectively expect over the next several years. So in 2014 our enduring assets were $41 billion, we do expect that to more than double over time. Again we're $64 billion currently, so we are executing on this part of our growth strategy.
Earnings before taxes, again $800 million in 2014. I noted that we would expect to see that move up perhaps to $900 million or so in 2016. This reflects a substantial increase in expected GMF earnings by 2018, certainly something we expect to see as our full captive penetration levels are achieved. And then additional enterprise benefits are expected to be realized through an integrated customer relationship management strategy which will result in incremental sales and improved customer loyalty.
So Chart 28, which is sort of a wrap up chart on GM Financial’s key strengths. We do have strategic interdependence with GM. We are absolutely a priority with GM to grow the business and expand our captive presence in North America, maintain our captive penetration levels internationally. We have a full suite of auto finance solutions offered in all of our markets with incremental growth opportunities, which includes additional product offerings and enhancements in some geographic expansion opportunities over time in our international markets. We have a very solid funding platform supported by investment grade ratings, along with the commitment by GM and GMF to running the business over time consistent with single A ratings criteria. Strong financial performance, balance sheet growth, liquidity, earnings, really all of our metrics are in fantastic shape.
And finally, we have an experienced and seasoned management team operating across business and economic cycles.
Finally we have a couple of charts 29 and 30 which provide information about where additional information can be available. We have a GMfinancial.com website with a very robust amount of information in our Investor Center and then obviously additional information available on SEC filings can be found referenced on Chart 30 as well as contact information for GMF and GM Investor Relations.
And that would conclude our prepared – my prepared remarks, I'll turn it back over to Steve Jones to kick off the Q&A.
Thank you, Chris. Given the team we have on the call and the focus on GMF, let me ask that you target your questions to those relating to GM Financial. Lois, would you please provide the Q&A instructions?
[Operator Instructions] Our first question is from Brian Johnson from Barclays.
Yes, hi. It's Brian Johnson. A couple of questions. First, when you talk about residual setting and marking the value of the residuals to market; a couple of questions. One, just housekeeping, can you if the value of the residuals appears to be going up, can you recognize -- do you in effect lower your depreciation? Or do you have to wait till that's sold to recognize what would be a gain on sale on that particular unit?
We can moderate our depreciation rate to slow the depreciation on vehicles that are performing – that are called out by ALG as performing better in the wholesale markets, which is something we are seeing this calendar year relative to trucks and SUVs for example. We have moderated our depreciation rate a bit on those in order to – again the goal is to have things kind of come down to what they are really going to be worth at the end of the lease term.
And second question is how much, as you do those adjustments, forward-looking estimates are you making around that, e.g., we think there's going to be lease supply coming in or we think there perhaps will be a softer or stronger, I suppose, a softer market a year or two out versus we're just taking this month's auction results and mechanically applying those?
No, ALG, again we use a third party to do this exercise, Brian. Certainly I just want to give a little bit of a plug and we are certainly developing as we go through time sort of our own expertise in data sets so we can make modifications to what we receive from ALG. But ALG – well, two things; first of all, ALG’s upfront initial estimate of the residual which is what we initially said on our books as we’re going to depreciate to, and then this quarterly marks that come in, that we tweak that initial estimate up or down really. ALG is not just taking auction values, it certainly feeds into what they are – that’s a key variable that they are looking at as far as how they re-estimate or re-analyze the performance of any given vehicle trim level that are at a very granular level. But they are certainly taking into effect or taking into their calculations supply, off-lease, high SAAR lease to high trade-ins, gas pricing and the expectation of where gas pricing is going to head is another key variable. That’s been frankly one of the variables – the gas pricing variable which has caused the outlook – improved outlook residual wise on trucks and SUVs to move up a bit, here in 2016, late ’15, early ’16. So it’s not all just auction value kind of raw data what happened last month, last quarter, it takes that into effect and then lays on all these assumptions which we view as pretty conservative and appropriate at this point in time to estimate what that residual value is going to be one year, two years, three years down the road.
Okay, second set of questions around sub-prime. Great chart on you versus the index. Can you maybe comment a few questions, one, strategically where do you see that used cars sub-prime support of non GM dealers going over time? Second, what are you seeing in the market in terms of competition in the new -- for that used car financing in particular some of the less well established, newer entrants or smaller players in the marketplace you don't seem to have the history of so you or Santander in this market. And then kind of how do you maintain -- and what impact is that having overall on delinquencies and performance, and then how do you kind of stay in the market and not suffer that same deterioration?
Yes, a lot of questions here, Brian. You may have to correct me – tell me if I don’t get to one of them but I think it's really kind of –
Well, one is strategically and one is just kind of short term what are you seeing in the market --
Yeah, well, I'm going to answer the last and first. We at GM Financial have sort of particularly in the used vehicle financing space we have allowed our market share in that space to erode dramatically. I mean if you go back over a two or three year time period, our presence in that used vehicle financing space, as the market got a little frothier and really became too narrowly priced, not even so much credit expansion, but just we thought too narrowly priced, we just kind of have sidled off to the sideline a bit. We still have a presence but it's way down from what it was. So we think that certainly one of the reasons why we're outperforming this index that we showed in the charts is we just maintain a lot of pricing and credit discipline. And that's not to necessarily say that others didn't -- a lot of – and this is maybe partly in response to another part of your question, a lot of the newer entrants in the space and they do end up in the industry part of this index that we showed target a different level of subprime. So subprime is a word that covers a fairly broad swathe of territory generally from 620 FICO all the way down south of the 500 FICO. And so you have some of the newer entrants that necessarily have to grab on to the credit scale down lower in order to get a toehold in and have a viable value proposition to dealers. So it's not all apples and apples quite frankly.
Where we think – and we certainly read some commentary just in the last 48 hours on pullback in subprime and pull-back in consumer demand for subprime loans. I think it's a little more complex and kind of a blanket observation there. I mean if you look at the market data kind of month by month by month by month, there are any number of smaller and larger players that kind of mash on the gas and then pull back, it kind of ebbs and flows a decent amount. And that includes Santander and Capital One and Wells Fargo and Chase Auto Finance and us and Ally and all the other, not just the small guys, who will express through their buying habits, a little more desire for a certain credit tier, or credit mix in one month or two. And then for whatever reason sort of pull back on that a little bit two or three or four months down the road. And if you're an auto dealer, be a CarMax or somebody else you can certainly develop a view that the market is tightened just because one of your primary lenders may have had ebbed versus flowed over a certain period of time.
So I don't think there's going to be -- we certainly don't view at GM Financial that there's going to become a lack of credit availability and subprime. It's certainly possible and I think we would say hopeful that pricing will firm a bit in subprime in order to fatten the margins back up a bit. But I don't believe that you're going to see any dramatic tightening, I think generally credit appetite at least across the larger and more established players of which we and the others are rattled off, are those guys, we think it will be fairly stable.
And sort of related to that if, these small players you talked about, if they are pulling back a bit from the market would you and the other larger ones pick up the slack in used car? Or would there be a net sort of, and maybe it's more on the six- to eight-year-old car market, withdraw buying, lending support and therefore buying support and could that impact used-car prices and that would trickle up to sort of the three to five-year residuals?
Yes, well, I mean again six to eight years is sort of outside of the daily whack of much of the larger participants. So, yes, it would be the smaller guys, the newer guys that maybe are in that market, that – at the margin I suppose could have some input, another input to where used vehicle pricing is headed, again we and most others expect that to continue to moderate. But I would say more strategically important to GM Financial is as the market firms a bit more, pricing wise availability wise, whatever on the two to four year old vehicles, we again have kind of sat on the sidelines a bit, and view ourselves as having potentially some dry powder to move back in, and increase our market share in a stabilizing market. Again our main mandate is to support GM and fund GM new vehicles and leases, but this is a very profitable area – a diminishing part of our business but a very profitable part of our business that we would look again to recapitalize on in a market where some of these more disruptive newer guys kind of maybe fade away or some of the larger participants maybe in a rising rate environment we all kind of back up and raise rates so we can generate better returns.
So strategically it is a business that you will be staying in opportunistically?
Absolutely. Absent some calamity in the funding markets that make it incrementally more difficult and we have to allocate -- if we have to choose obviously we're going to choose to support GM new but as long as the funding markets are viable for us to be in this business we would expect to stay and GM absolutely endorses that.
Okay, and final question, again around business mix. Your floor plan penetration is obviously less than your subvented penetration because the dealers are the ones who have to be sold on you as a floorplan lender. We've often heard through the downturns that the wholesale support of the dealers has been [Indiscernible] helping the auto company through the downturn. So how are you thinking about your current penetration? Is that in terms of net interest margin, obviously losses are low, and ROA good business to go after? Or are you just sitting there saying okay, look, it is what it is now and should my -- should the large bank competitors who are providing floorplan now tail off as they are often getting downturns their commitment to dealers or going to be ready and willing to write that? Or is it something where you have shoe leather on the ground trying to drum that up?
It really is a combination. I mean we -- the returns in this business are abnormally low right now because of pricing competition really from everyone. We obviously are dealing with a large legacy provider of floorplan in this product channel as well. We are actively looking to grow the business, we're attempting to stay as price disciplined as possible so that we stay right side up and generate profits from the business. We're very -- we're okay with where we are now as far as having scale and size and ability to capitalize if and when the next downturn comes. So again it's kind of a combination, but absolutely agree with your last premise that there may need to be a bit more of a catalyst for us to increase our penetration from kind of the mid teens upwards to 20% or even north of that over time. And that maybe the economic cycle that we have to see to have that happen.
Your next question is from the line of Ryan Brinkman from JPMorgan.
Hi, this is Samik on behalf of Ryan. I had a couple of questions. The first one I really wanted your views on the automotive finance industry in China. On slide 9 you have indicated that your penetration there has increased year over year. So I sort of wanted a view on how you are placed relative to the other global JVs there and how do you see also [indiscernible] index there and what do you see in terms of potential of that market, like where do you see retail penetration sort of maturing for you guys there in that market?
When we first started looking at acquiring the interest in this JV, the penetration of the JV in that SGM sales channel was extraordinarily low, I’d say, it was in the low teens type range, I want to say 9% to 12%, somewhere, when we first started doing diligence on this three years ago. Now it's in the mid 20% range, it’s moved up quite a bit really just over the last twelve months or so. There's more subvention support being put into the market by the manufacturer which is a JV as well in China. GM and their Chinese manufacturing partner which are effectively the two partners that own the financing JV as well. So subvention has come more into the market to support the financing products which has made them relatively more attractive to Chinese consumers. My understanding and I don't have a real hard data on this but my understanding is that other financing providers, captives in the Chinese market have penetration levels that are there maybe a little bit north of 30%, and we’re certainly moving in that direction and have taken some nice steps.
I don't think you'd find -- again I can't speak with to any of the luxury brands, again maybe some of the lower mid vehicles like GM and all, again I am not sure what Mercedes and all, they have as far as penetration there. But I think we still have some opportunity to move up from the mid twenty's into the 30% range, maybe even 40% over time. That part of it is cultural, again part of it is just GM and the Chinese JV partner and the management team, they are supporting the product and making consumers aware of it and a cultural assimilation of the product over time as well.
And just a small follow-up on the China business here. Are you able to comment on the return on assets in the China process maybe like North America where do we stand with some of the back of the envelope math I was doing shows a big difference between the ROAs there.
Yes I mean it's a very very prime book of business in China. So the returns – if you just did an asset level return there you’d end up with something that much more approaches what we look at it at prime in the US. Pricing is -- net interest margins are probably better in China than they are in the North American market for any and all financing products, you're going to end up a little bit above, maybe in North American world. But again losses in the Chinese portfolio are less than 50 basis points right now. So the return profile is going to be fairly commensurate with that as well.
Okay, and can you comment on the opportunity of growth that you have in international outside China because it looks like some of your penetration metrics there are pretty full already. So I think you had mentioned something about product offerings being expanded. Can you sort of give us more details on that?
Well, we are working actively to develop a bit more of a leasing presence in Germany, for example, where we’ve introduced leasing product roughly a year ago, it's doing reasonably well. Mexico, similarly has a very nascent leasing product in it. There are some geographic opportunities. We added Peru in Latin America last year. We're looking at a handful of countries, smaller countries, they’re not going to be massive – they are not going to be in kind of big four category that I mentioned earlier. But there are some opportunities in the European market, not necessarily anything on the front burner, now for us in the Middle Eastern or Eastern markets. So we're not necessarily targeting India or Australia but certainly those could come into view over time. Again mainly leasing capabilities in some of these countries, something called full service leasing which has almost an element of fleet management for businesses and consumers. So there's kind of a constant view of what can we do to support the OE.
And just, finally, a housekeeping clarification. On slide 27 where you show ending earning assets and your projection of total earnings before taxes, just want to clarify, is the doubling of pre-tax income target for 2018 for GM Financial?
Yeah, we kind of nuanced that here a little bit frankly. This slide was I think first used by GM a couple years back, as we were sitting in 2014 and we were kind of in the process of launching the full captive business. The reality is here in 2016 -- one of the assumptions that really underlay the doubling of earnings was in a rising rate environment makes the relative attractiveness of subvented product nice for consumers versus just borrowing from a credit union or a bank. We obviously are not in a rising rate environment. And so we're seeing relatively less subvention in the market which of course we get a 100% of. So the doubling of earnings is going to occur. We feel very confident that that will happen over time, whether we absolutely stick that in 2018 or it slides a bit to 2019 or so. I think it is a bit unclear at this point given we don't know dynamically where the interest rate environment may move over the next six to twelve months. Certainly the volume can swing around pretty dramatically from quarter to quarter depending on what GM has in the market. But it’s just a little more nuanced on when we would expect to see that doubling occur.
Thank you and our next question is from the line of Colin Langan from UBS.
Thanks for taking my question. I just wanted to go back to sub-prime again, unfortunately. On slide 25, I mean do you have a view of whether you think delinquencies for the industry will get worse. When you talked about how some of it's not really apples to apples and we're looking at performance because there's been a lot more of the sort of lower quality sub-prime that's higher risk. I mean any color on how an apples to apples similar credit quality has done, is that more consistent with you and it's fairly steady year over year? And are you seeing, I think I don't know if you directly said, are you seeing the lenders exit at this point now that defaults have jumped up?
Yeah, well I will take the second one. I mean we're not seeing anybody ‘exit’. What you see again, just look at the data kind of month by month, you see lenders pull back a bit, you see appetite then reappear from those same lenders. I am not just talking about the smaller newer entrants that has had to do with a number of the larger entrants, going back to several years where there’d be a lot of appetite and a bit of a pullback and maybe in a re-expression of that appetite. And it really hasn't again in our view been a race to the bottom from a credit perspective as much as it's been a willingness to take less net interest margin in order to grow an asset base by, again a lot by the lenders.
You know, apples to apples on credit. I'll just give you kind of the GMF, our data, our perspective. And again this is very consistent with what is out in the public and we would – so this will be obviously bit of an endorsement of that. Loans that we put on the books and this really is irrespective of credit tier, this applies across all credit tiers, sub prime, their prime even to a certain degree in prime, loans that we put on the books originated in 2015 with like credit attributes for loans that we put on the books in 2014 are performing a little weaker and 2014 is performing a little weaker than ’13 and ’13 is lower than ’12 and you can kind of cascade this back, really all the way back to 2010 when credit performance was just pristine. We had tended to joke sometimes, you couldn't make a bad loan in 2010. So those all performed incredibly well and as you've gotten further away from the credit cycle, even without expanding your credit box really, you're just going to see normalizing trends in credit, be it delinquencies, unit defaults, the behavioral aspects of the consumer. And then you lay onto that when it comes to losses, that delinquencies and defaults, that’s consumer behavior driven, those have begun to normalize kind of year by year by year back to levels that existed back in 2004, ’05, ’06 and then you lay on top of that the fact that year over year we've had a little bit of softening in used vehicle prices so the amount that we recapture and we have to repossess the vehicle and sell it, that that will lead -- that kind of I’d say exacerbates but that contributes also to the net losses kind of moving up.
Again same credit for same credit, apple for apple you see a normalizing trend really across the industry certainly in GMF’s data but it is nothing that we -- it's really nothing at this point that we look at as alarming, it’s just kind of getting us back to what we're generally in our subprime business viewed as an expected credit profile. We've been – in subprime everybody has seen the benefit of tailwinds, those tailwinds are now not going as part, right.
That makes sense. Any color if you can look back further over like a 10- or 20-year period are the delinquencies concerning? I mean, obviously, I think you make a valid point that from 2010 you're going from extremely strong comp, I mean if over a longer period is this in line with history or –
No, our overall – let me answer them in two ways. A) the demographic of a sub-prime borrower today for us is generally better than what a subprime borrower looked for us ten years ago. They have better household income, little more stability on residence, a little more down payment going into the end of the deal. So we have a better through the door subprime consumer now than we did ten years ago. Part of that at GMF has been because our subprime borrowers now are – we’re being more selective on used vehicle borrowers and you're probably seeing a little bit more of a self-selected better consumer coming in to buy GM new. But then the credit performance itself that we see out of our subprime borrowers now is slightly better. We're still slightly better than where we were with credit performance back say in 2005 and 2006. So there still is frankly – and kind of what we're looking at for 2016 is and maybe into early 2017 is kind of the final bit of that normalizing trend that I discussed, then things will kind of be back to what the world looked like ten or twelve years ago.
Very helpful. Just last question, any concerns about leasing for the industry overall? There's a lot of hype we're at record leasing levels, do you think that's a concern as we go forward, do you think other lenders are taking on too much risk?
Yeah, I think and I believe GM would tell you that leasing has probably gotten to be a higher percentage of their overall sales mix than they would like to see sustained over time. It tends to be a slightly more expensive product for the manufacturer to support in the market. That comment relates to – that’s a very GM specific comment. Certainly luxury makers are always going to have very high penetration of leasing. Again as I noted to Brian Johnson, I think in my first response we feel very confident at this point that the residual experts are properly bringing into account the supply and the used vehicle values and the gas prices and all the other things that will have a downward impact on residuals over the next three years or so. So we don't feel like we've created any extreme amount of exposure for the business, certainly it's very cyclical. And over time residuals have problems and there's usually some impairment taken but at this point we don't really see that that's going to occur over the near term.
Thank you and our next question is from the line of Mike Levin from Deutsche Bank.
Good morning, guys. I wanted to see if you could help me understand some comments GM has made around the GMF business kind of after you guys ramped to full scale 2018, 2019 timeframe. You guys made comments that maybe upwards of 90%, 100% of the net income could be dividended back to the parent company. Just looking at your largest domestic comparison, they are arguably a mature business already today and are maybe only dividending back 10% or so of their net earnings. Just kind of -- would like to understand if there's a difference in the business, if there is a difference in the way that you guys view the growth over time or sustainable leverage ratios or just how to understand 100% dividends as a possibility versus what we kind of already see and hear?
Yeah, I'm not sure I can fully -- I'd love to give you a fulsome answer. We are -- and I think any analysis or thinking around this topic even at a GM level is just so far out there in time that it's really kind of impossible to say. I mean certainly in a very steady state environment where the portfolio is not going up, not going down, not having any kind of issues on residual values or anything of that nature, no investments in IT, whatever there, there can certainly be -- I don't know if it's 80%, 90% or 100% of dividending, is certainly mathematically possible. The reason why I say it's kind of premature, or we’ve got at least three -- even though we get kind of into maybe a steady state by ’18 or ’19 we still will have to stay very focused on that leverage ratio and maintaining our ratings and all that probably for another couple of years even after that steady state. So I am not sure the math even works that quickly, there's even some the way depreciation works on leased vehicles and what types of tax advantages we take with that can play into when dividending becomes possible.
So again I'm obviously not here to just anything that GM may have said about when the possibility of dividending is -- it's really just so far out on the horizon to us at GMF where we need all those capital in the business for at least three if not more years, three or four years it's kind of hard to say.
So I mean it's fair to say that the next three to four years zero dividends and then depending on where you are in terms of leverage and growth at that point, you might kind of --
I think that's very safe to say.
End of Q&A
Thank you. And due to time constraints, we’re unable to take any additional questions at this time. I will now turn the conference over to Steve Jones for any closing remarks.
Thank you, Lois. This concludes the behind the charts presentation. If you have additional questions please feel free to contact me. My contact information is provided at the end of the slide presentation. Thank you for participating today and for your continued support of GM and GM financial. Have a nice day.