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GM Not Overly Exposed To Subprime Auto Lending

Rumors abound about subprime auto lending. This article examines GM's (NYSE:GM) exposure to subprime (FICO scores <620) auto loans.

It appears that the exposure to subprime borrowers for General Motors is not that bad. Prime borrowers (FICO of 680 and above) account for 62.6% or $5.147 billion, borrowers with a FICO of 620 to 679 account for 16.8% or $1.384 billion, and subprime of less than 620 account for 20.6% or $1.698 billion. A year ago, subprime accounted for 30% of the portfolio.

Of GM's entire $48 billion portfolio, North American Consumer accounts for 32%, North American Lease 27%, North American Commercial 7%, European Consumer 14%, European Commercial 7%, Latin American Consumer 11%, and Latin American Commercial 2%. The entire portfolio is levered 7.5 to 1. Not bad.

Net losses on loans in the first half of 2015 was 1.7%. Look out for the repo man! Of the Commercial lending, 87% was floorplans. These are the loans auto dealers take out to purchase their inventory. In other words pretty safe. If an auto dealer defaulted on their floor plan, the manufacturer would repo brand new cars and take them to another dealership. About 1% of Consumer loans in Latin America are 31 to 60 days late.

Perhaps banks are picking up these subprime loans. This article in Credit.com asks if there is a bubble in subprime auto lending. According to the Wall Street Journal, leaders in the auto lending market include, "... Ally Financial Inc. (NYSE:ALLY), with 7.31% of new-car loans, JPMorgan Chase & Co. (NYSE:JPM) with 5.96%, Capital One Financial Corp. (NYSE:COF) with 4.38%, Wells Fargo & Co. (NYSE:WFC) with 3.46% and TD Bank (NYSE:TD) with 2.33%. In the used car market, the leaders are Wells Fargo at 6.56%, Ally at 4.41% and Capital One at 4.35%."

It's often said that people will default on their auto loan last because they need transportation. Also, as long as the car is still in condition, an auto can be resold if it is repossessed. Borrowers must carry full coverage insurance in case of an accident.

One area of concern is that modern loans now go beyond 60 months. It used to be not too many years ago that a five-year loan was the longest term a borrower could go. An older car may with a longer loan incentivize a borrower to default as the car may not be worth much. If the car is in negative equity, the lender will get burned when it tries to resell at the auto auction. According to this article, loans of 74 to 84 months make up 30% of new financing.

There may be a bubble in subprime auto lending but it's not at GM. Not as far as I can see. Perhaps in a subsequent article we will examine subprime lending exposure to banks.


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