GMAC’s Bank Holding Status Impacts Its Relationship with GM Dealers
NEW YORK — While overall, GMAC officials appear thrilled to have gained bank holding status, which has opened up the level of credit spectrum the company can fund via the auto division, on the other side of the coin, it also apparently currently limits the retail and wholesale assets that can be funded from GM dealers due to regulations.
GMAC said it began expanding its retail automotive financing activities in the United States to include a broader spectrum of consumers immediately after receiving the TARP investment on Dec. 29.
"While this access to liquidity has improved the company's ability to extend credit to qualified consumers, there are still limitations on other funding sources for automotive assets," officials noted in a statement.
"GMAC Bank remains a key funding source for GMAC; however, until GM is no longer considered an affiliate of GMAC Bank, the bank is limited in the retail and wholesale assets that can be funded from GM dealers due to the current regulations," they added.
GMAC's global automotive finance business reported a net loss of $1.3 billion in the fourth quarter of 2008, compared with net income of $137 million in the year-ago period.
The decline was attributable to impairments on operating leases in the U.S. car portfolio and the international full-service leasing portfolio related to a decline in used-vehicle prices, higher provisions for credit losses due to weaker consumer and dealer performance and mark-to-market adjustments on derivatives, officials indicated in a preliminary report.
New-vehicle financing originations for the fourth quarter of 2008 decreased significantly to $2.7 billion of retail and lease contracts from $13.4 billion in the fourth quarter of 2007.
Reduced access to funding related to the global capital and credit market disruption prompted GMAC to implement a more conservative purchase policy for consumer auto financing in the United States, which significantly affected origination volumes in the quarter, according to the company.
"In addition, originations declined in the international operations as the business began to implement plans to cease or curtail operations in select countries in Asia-Pacific and Europe. A significant decline in global automotive sales also contributed to reduced origination volumes," executives explained.
Credit losses increased sharply in the fourth quarter of 2008 to 2.10 percent of managed retail assets, versus 1.05 percent in the fourth quarter of 2007.
The increase is related to higher loss frequency and severity stemming from the U.S. economic recession, executives said. Delinquencies also increased to 2.96 percent in the fourth quarter of 2008, compared with 2.68 percent in the year-ago period.
GMAC Financial Services reported 2008 fourth quarter net income of $7.5 billion, compared with a net loss of $724 million in the fourth quarter of 2007.
Results in the quarter were largely driven by an $11.4 billion after-tax gain from the extinguishment of debt related to GMAC's fourth-quarter bond exchange, which was partially offset by losses in the global automotive finance and mortgage businesses, the company highlighted.
Adversely affecting results in the quarter were an impairment on lease residuals due to falling used-vehicle prices, provisions for loan losses as credit quality trends and asset values continued to decline and impairments on equity investments, GMAC reported.
For the full-year 2008, GMAC reported net income of $1.9 billion, compared with a net loss of $2.3 billion for 2007. Affecting results for the full-year were significant losses at Residential Capital LLC, as adverse mortgage and housing market conditions domestically and internationally continued to persist.
In addition, weak credit conditions and impairments on lease residuals led to losses in the automotive finance business. The insurance operation remained profitable throughout 2008, officials summed up.
"The past year was clearly an extraordinary period for GMAC. Our business, like many others, was significantly affected by the U.S. recession, the global capital and credit market disruption, falling auto sales and a mortgage market in turmoil," said GMAC Alvaro de Molina, chief executive officer. "These extraordinary conditions called for nothing less than extraordinary actions, and we closed 2008 with some encouraging steps toward a more positive future for GMAC."
"In the past 45 days, GMAC received approval from the U.S. Federal Reserve to become a bank holding company, successfully completed the largest debt exchange in U.S. corporate history, received a TARP investment, and completed a rights offering. Today, GMAC has a stronger capital base and is positioned to be more competitive over the long-term," de Molina said. "Our work is just beginning, however, to enhance management practices, while also operating through this difficult economic cycle and transitioning and diversifying the company."
Liquidity and Capital
GMAC's consolidated cash and cash equivalents were $15.2 billion as of Dec. 31, up from $13.5 billion at Sept. 30.
Of these total balances, ResCap's cash and cash equivalents balance, including GMAC Bank, was $7.0 billion at year-end, up slightly from $6.9 billion at Sept. 30, 2008. The change in consolidated cash is related to increased deposits at GMAC Bank and the $5 billion U.S. Department of Treasury investment under the TARP, which was offset by costs associated with the bond exchange, lower dealer deposits and debt maturities.
GMAC Bank total assets were $32.9 billion at year-end, which included $10.9 billion of assets at the automotive division and $22.0 billion of assets at the mortgage division.
This compares to $32.9 billion of total assets at Sept. 30. Deposits increased in the fourth quarter to $19.3 billion at Dec. 31, which included $7.2 billion of retail deposits, $10.6 billion of brokered deposits and $1.5 billion of other deposits. This compares to $17.7 billion of deposits at the end of the third quarter, with $4.5 billion of retail, $10.8 billion of brokered and $2.3 billion of other deposits.
GMAC said it was significantly bolstered its regulatory capital position during the fourth quarter and its application to become a bank holding company was approved on Dec. 24, 2008.
At the time of GMAC's application to become a bank holding company, the U.S. Federal Reserve established an initial regulatory capital target for the company based on expected balance sheet structure and size, as well as company performance. Since then, GMAC's asset levels had declined and estimates of the fourth quarter financial results were revised. Therefore, the regulatory capital requirement target was adjusted using a risk-based ratio approach when the bank holding company order was issued.
Total book equity at Dec. 31, 2008 was $21.9 billion, compared with $9.2 billion at Sept. 30. Contributing to the increase were an $11.4 billion gain from the bond exchange, $234 million of capital from new preferred interests issued to bondholders, $5 billion of preferred interests from the TARP investment and $750 million in additional common equity from the contribution by General Motors and FIM Holdings LLC of their first-loss participation interests in a ResCap credit facility.
In January 2009, GMAC completed a rights offering whereby GM and FIM Holdings collectively purchased an additional $1.25 billion of GMAC common equity interests. In addition, GMAC completed a transaction that extinguished certain debt and resulted in approximately $600 million of equity. Both transactions further improved the company's capital position, officials pointed out.
As a result of these actions and by achieving a tangible equity-to-assets ratio of 10.9 percent at year-end, GMAC believes it has an appropriate level of capital for the current market environment.
"Looking ahead, challenges still remain and GMAC will focus on transitioning the company to meet all bank holding company requirements; further strengthening the liquidity and capital position; building a world-class organization; expanding and diversifying customer-focused revenue opportunities in auto and mortgage; and driving returns by repositioning the risk profile and maximizing efficiencies," de Molina said. "This will be the path to strengthening the enterprise for the long-term."