Captives poised to gain ground on banks

Captive finance companies are set to continue taking auto financing market share from banks this year, as incentives are high, leasing occupies a big chunk of the market, and several big banks are cutting back on auto loans.

Toyota Financial Services, which serves the Toyota and Lexus brands, for example, confirmed Tuesday that it had retained its No. 1 ranking in the U.S. in 2016 in terms of new-vehicle loans and leases combined, the same spot it held in 2015.

As a group, captives accounted for 28.4 percent of new and used, loan and lease originations combined in the fourth quarter of 2016, up from 27.8 percent a year ago, Experian Automotive data show.

Banks still had a larger share, at 32.9 percent, but that was down from 35.6 percent a year ago. Credit unions and independent finance companies also show small share gains, Experian said.

Shifting focus

Banks aren’t dropping out of auto financing, but they are shifting in some cases to segments with less competition from the captives and with fatter margins -- say, to used cars, to customers with prime and near-prime credit, and away from superprime, said Jim Houston, senior director of auto finance at J.D. Power and Associates.

“Traditionally, as you start to see overall sales volume leveling off and delinquencies increasing, the big banks deviate toward used-car financing, which is higher-margin, and doesn’t really require them to change their lending standards,” Houston told Automotive News.

Captives have some well-documented tailwinds behind them, such as nearly exclusive access to factory-sponsored incentives and close to a monopoly on leasing. In addition, Houston said low-rate finance incentives should be more popular than ever, since the Federal Reserve is raising interest rates, albeit from extremely low levels.

Besides consumer loans, the attractiveness of low, subvented rates is also growing in the floorplan segment, since captives often offer better wholesale rates to dealerships that steer more retail business their way, he said. “As inventory financing becomes more expensive, that becomes more important,” Houston said.

Ace in the hole

But access to retail incentives is the real ace in the hole for captives. Toyota Motor Credit Corp. said incentives from Toyota Motor Sales U.S.A. Inc. supported 62.8 percent of the captive’s new-vehicle loan originations in the quarter ended Dec. 31. That was up from 55.8 percent a year ago.

Incentives went toward 27.1 percent of TMCC’s used-vehicle contracts in the same period, up from 20.9 percent; and were part of 88.9 percent of the company’s leases, up from 61.9 percent, according to a filing with the Securities and Exchange Commission.

Toyota Motor Sales is the U.S. sales and distribution arm. Toyota Motor Credit is the parent company of Toyota Financial Services, which serves both Toyota and Lexus.

The numbers in the SEC filing exclude sales for Southeast Toyota Distributors, of Deerfield Beach, Fla., the independent distributor for five states. Southeast Toyota’s parent company, JM Family Enterprises, has its own captive finance company, World Omni Financial Corp.

You can reach Jim Henry at

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