General Motors And Ford: Who Is Better During A Subprime Auto Crisis?

| About: Ford Motor (F)
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Summary

General Motors shareholders are more exposed to writedowns than Ford shareholders.

GM's portfolio's credit quality is worse than that of Ford as evidenced by the significantly higher charge-off rate.

GM's borrowers have lower FICO scores.

GM is trying to pull back subprime lending, but it's still way behind Ford.

I would feel much safer with Ford during a crisis.

General Motors (NYSE:GM) and Ford (NYSE:F) both have extensive credit operations to generate vehicle sales. As investors have become more worried about car loans suffering the same fate as mortgages in 2008, I think it may be a good idea to compare GM and Ford's credit arms.

Credit Exposure

Based on receivables-to-sales, it would appear that Ford has a higher reliance on credit. Ford's receivable (including investments in operating leases) as a percentage of annual sales was 88.3% in 2016, this compares to GM's 49.3%. However, this doesn't tell us the current exposure to equity holders should the receivables be written down, a per share metric is more suitable. On a per share basis, GM shareholders are getting $54.66 worth of receivables per share as of Q1, far above Ford's $31.81. This means that GM shareholders are more at risk given a similar magnitude of write-down.

Credit Quality

The annualized net-charge off rate tells us how much of the current portfolio will become uncollectible on an annual basis. In Q1, the net charge-off rate was 1.38% for GM, much higher than Ford's charge-off rate of just 0.37%. While this may seem like a tiny difference, a low quality portfolio will underperform significantly during a downturn as the underlying credit profiles of the borrowers are worse to begin with. Since we are talking about what could happen in the event of a "subprime auto crisis," GM shareholders should clearly be more concerned than Ford shareholders.

The discrepancy between charge-offs can be easily explained by the FICO scores of each respective company's originations. As of Q1, a whopping 44% of GM's North American consumer receivables had a FICO score of less than 620. It's unclear what Ford's current subprime make up is, but given the fact that the average placement FICO score over the past six quarters is 740, I believe that Ford's loan book has a higher quality. Note that "higher risk portfolio" (i.e. subprime) is only 6% of originations.

Source: Ford Company Presentation

GM has been pulling back on subprime lending, but the quality of new originations are still way behind that of Ford. The chart below shows that 14.3% of originations are subprime.

Source: GM company presentation

Conclusion

There are two ways to view the use of credit. One could say that a higher reliance on credit reflects a savvier management that is able to capture incremental sales that otherwise would've been lost; a more conservative perspective would be that higher credit sales lead to higher risk. Given the current sentiment surrounding auto loans, I believe that less is more (i.e. less credit is a good thing). Given the above analysis, I believe that GM takes on more credit risk, which translates to more risk down the line when the economy sours. That being said, my current economic outlook does not signal the need to run for the hills (read No Bubble Here); though if you are a defensive investor, I believe that you may wish to choose Ford over GM to protect yourself from the unlikely scenario of a subprime auto crisis.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.