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Slide 1: Chapter 6 Finance Companies McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Slide 2: Historical Perspective  6-2 -2 Finance companies originated during the depression.    Installment credit General Electric Capital Corporation. Competition from banks increased during 1950s. GMACCM is one of the largest commercial mortgage lenders in U.S.  Expansion of product lines 
Slide 3: Finance Companies Activities similar to banks, but no depository function.  May specialize in installment loans (e.g. automobile loans) or may be diversified, providing consumer loans and financing to corporations, especially through factoring.  Commercial paper is key source of funds.  Captive Finance Companies: e.g. GMAC  Highly concentrated   6-3 -3 Largest 20 firms: 65 percent of assets
Slide 4: Major Types of Finance Companies  6-4 -4 Sales finance institutions  Ford Motor Credit and Sears Roebuck Acceptance Corp. HSBC Finance and AIG American General. CIT Group and FleetBoston Financial. Equipment leasing and factoring  Key Bank locally  Personal credit institutions   Business credit institutions  
Slide 5: 6-5 -5 https://www.hfc.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext_sot=S http://www.hsh.com/not-the-associates.html https://www.beneficial.com/learn-about-loans/home/default_customer.html?WT_srch=&DCSext http://www.kefonline.com/ http://www.docshop.com/education/vision/refractive/lasik/financing/
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Slide 8: Largest Finance Companies Company Name General Electric Capital Services Citigroup GMAC Ford Motor Credit Company J. P. Morgan Chase Total Assets (Millions) $333,780 164,205 154,764 153,000 144,835 6-8 -8
Slide 9: Balance Sheet and Trends  6-9 -9 Business and consumer loans are the major assets   52.8% of total assets, 2006. Reduced from 95.1% in 1977. Increases in real estate loans and other assets.  Growth in leasing  Finance companies face credit risk, interest rate risk and liquidity risk. 
Slide 10: Balance Sheet and Trends  6-10 -10 Consumer loans   Primarily motor vehicle loans and leases. Anomalous low auto finance company rates are anomalous following 9/11 attacks.   Attempts to boost new vehicle sales via 0.0% loans lasted into 2005. By 2003, rates 3.5% lower than banks on new vehicle rates
Slide 11: Consumer loans (continued)  6-11 -11 Generally riskier customers than banks serve.   Subprime mortgage lenders Jayhawk Acceptance Corp.  From auto loans to tummy tucks and nose jobs Increase in “loan shark” firms with rates as high as 30% or more.  Payday loans   390 percent APR (Implication for EAR is staggering!)
Slide 12: Balance Sheet and Trends  6-12 -12 Mortgages     Recent addition to finance company assets Smaller regulatory burden than banks May be direct mortgages, or as securitized mortgage assets. Growth in home equity loans since passage of Tax Reform Act of 1986.  Tax deductibility issue.  Conversion of credit card debt  2006 average home equity loan $82,872  Defaults in subprime and relatively strong credit mortgages in 2007
Slide 13: Business Loans  6-13 -13 Business loans comprise largest portion of finance company loans.  Advantages over commercial banks:    Fewer regulatory impediments to types of products and services. Not depository institutions hence less regulatory scrutiny and lower overheads. Often have substantial expertise and greater willingness to accept riskier clients.
Slide 14: Business Loans  6-14 -14 Major subcategories:   Retail and wholesale motor vehicle loans and leases Equipment loans  tax issues and other associated advantages when finance company leases the equipment directly to the customer  Other business loans and securitized business assets
Slide 15: Liabilities  6-15 -15 Major liabilities: commercial paper and other debt (longer-term notes and bonds).  Finance firms are largest issuers of commercial paper (frequently through direct sale programs).  Commercial paper maturities up to 270 days.  Consequently, management of liquidity risk differs from commercial banks relying on deposits
Slide 16: Industry Performance  6-16 -16 Strong loan demand and solid profits for the largest firms in the early 2000s  Effects of low interest rates  Not surprisingly, the most successful became takeover targets   Citigroup/Associates First Capital, Household International/HSBC Holdings 2005, 2006: falling home prices and rising interest rates Pullback from subprime loans  Mid 2000s problems arose  
Slide 17: Regulation of Finance Companies  6-17 -17 Federal Reserve definition of Finance Company  Firm, other than depository institution, whose primary assets are loans to individuals and businesses. Subject to state-imposed usury ceilings.  Much lower regulatory burden than depository institutions.    Not subject to Community Reinvestment Act. Lack the banks’ regulatory safety-net
Slide 18: Regulation  6-18 -18 With less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to obtain funds.  Lower leverage than banks (11.4% capitalassets versus 10.36% for commercial banks in 2006).  Captive finance companies may employ default protection guarantees from parent company or other protection such as letters of credit.
Slide 19: Global Issues  6-19 -19 In foreign countries, Finance companies are generally subsidiaries of commercial banks or industrials  In Japan, ownership of finance companies by banks created opportunities when banks hit by increase in nonperforming loans  GE Capital/Japan Leasing Corporation
Slide 20: Pertinent Websites American General www.aigag.com Federal Reserve www.federalreserve.gov Citigroup www.citigroup.com Consumer Bankers Association www.cbanet.org Ford Motor Credit www.fordcredit.com General Electric Capital Corp. www.gecapital.com General Motors Acceptance Corp. www.gmacfs.com HSBC Finance www.hfc.com Household International www.household.com 6-20 -20