Fitch Ratings is projecting that “normalization” is ahead for many major U.S. captive finance companies.

Analysts arrived at that position because they see strong asset quality and profitability measures among several captive finance companies are expected to continue to revert slowly to what Fitch called “normal” levels, driven by higher competitive pressures, moderately eased underwriting standards and higher regulatory and compliance costs.

Fitch shared that assessment in a recent report titled, U.S. Captive Finance Companies: 2014 Review — Normalization in Profitability and Asset Quality Expected in 2015.

Fitch’s captive finance peer group consists of 11 firms, including the subsidiaries of manufacturers Ford, General Motors, Toyota, Honda, Nissan and Harley Davidson. The balance of the group includes Boeing Capital, Caterpillar Financial Services, IBM Global Financing, John Deere Capital Corp. and Navistar Financial Corp.

“Despite the expectation of continued performance normalization, we see captives likely maintaining solid performance overall, while continuing to benefit from diversified funding sources and less asset encumbrance relative to pre-2008,” analysts said.

“These factors, along with continued stable and/or improving financial conditions for parent companies supports the current ratings assigned to U.S. captive finance companies,” they continued.

Fitch reported that average net loss rates for the peer group inched up slightly to 0.65 percent in 2014 from 0.63 percent in 2013. Despite the increase, the firm pointed out that net losses remain 13 basis points below a more normalized (five-year historical average) level of 0.78 percent.

“Improved household net worth, job growth, low interest rates and lower gas prices, combined with high used-car values, have underpinned robust credit quality for the group,” analysts said.

“As these conditions normalize, so too will captive asset quality, particularly for the auto lenders,” they continued. “Delinquency rates in 2014 hovered near or just below their five-year average rates, which we believe also supports a continuing trend toward credit quality normalizing in 2015.”

Fitch also highlighted pretax profit margins for the group remain solid, averaging almost 30 percent across the U.S. group, down from about 31 percent in 2013.

Analysts noted GM Financial saw what they described as a “meaningful” decline in its profitability to 16.8 percent in 2014 from 26.4 percent in 2013, reflecting the asset-mix change to low-return, low-risk prime and commercial loans from high-return, high-risk subprime loans.

Conversely, Fitch recapped that American Honda Finance and Toyota Motor Credit each posted pretax margins increases from 2013 levels, “which was largely attributable to hedging gains from the U.S. dollar strengthening against the euro and the yen,” according for the firm.

Analysts added that across captive finance companies, higher absolute leverage levels, relative to stand-alone finance companies, also continue to be a meaningful differentiator of financial performance. Leverage, on a debt/equity basis, averaged 6.7 times for the peer group as of Dec. 31.

Fitch went on to mention that “relatively stable” economic conditions in the U.S. have led to “good” auto sales and “good” portfolio growth among U.S. captives.

Average portfolio growth came in at 5.5 percent among the group of 11 in 2014. That growth was just slightly above 2013 when excluding the outsized impact of GM Financial, which acquired Ally Financial’s leasing international operations that year.

Fitch pointed out that new-vehicle sales continued to increase in early 2015, hitting 17.1 million on a seasonally adjusted annual rate in March. In 2014, 16.4 million units were sold, up 6.5 percent from 15.5 million units in 2013.

Although not yet returning to pre-crisis levels, Fitch has observed a modest increase in captive finance companies’ use of short-term funding over the last several years.

Analysts computed that short-term debt accounted for no more than 20 percent total debt in 2014 for all captives, with the exception of Honda Finance and Toyota Credit, which had 22 percent and 31 percent, respectively, of total debt attributable to short-term debt in 2014.

“A higher dependency on the short-term markets raises the risk of a funding disruption under market stresses, with potential ratings implications for the parent and captive,” analysts said.

“Positively however, captive finance companies maintain committed third-party liquidity support to reduce the impact of funding disruptions,” they went on to say.