Five Top Auto Finance Execs Discuss Market Challenges at AFSA

SAN FRANCISCO — More than 350 auto finance executives, vendors and dealers turned out in San Francisco for the American Financial Services Association's 12th annual conference and exposition.

While a variety of topics were covered at the event, which had a sold-out exhibit hall, one of the most informative and entertaining panels featured the chief executive officers of several automakers' financial arms, Chase Auto Finance and AmeriCredit.

Taking the stage for the discussion titled Managing Profitable Growth were Michael Bannister, chairman and CEO of Ford Credit; Dan Berce, president and CEO of AmeriCredit; George Borst, president and CEO of Toyota Financial Services; Marc Sheinbaum, CEO of Chase Auto Finance; and Stephen Smith, senior vice president of financial services at American Honda Finance.

Moderator Dennis McCuistion, host and executive producer of the "McCuistion Program" on PBS Television, appeared to have a great time comparing the panelists to politicians as they side-stepped answering harder questions at first and put a more positive spin on some of their responses.

In fact, just after the panel concluded and the next one started, apparently Mitt Romney officially announced the end to his presidential campaign. McCuistion pointed to a few of the executives on stage and possible contenders to pick up the campaign flag.

"It's open season on five very knowledgeable individuals," McCuistion pointed out when introducing the panel.

When asked if they are predicting a recession? One by one the executives responded in similar ways that they are not, explaining that their companies take long-term views. However, all indicated that while they are not expecting the worst, they are preparing for it.

For instance, Sheinbaum, of Chase Auto Finance, responded to this question by saying, "We're not predicting a recession, but preparing for one. We just have to act accordingly. Look at each expense item more aggressively than we normally would do."

He pointed out that the finance industry has been in this cycle before, saying, "How much worse will it get?"

As for Borst, with Toyota Financial Services, his take was a bit tongue in cheek, "Economists are a very depressing group. We'll see better growth as the year goes on."

He did note that Toyota Financial Services is in a slow growth period right now. However, about 80 percent of his company's portfolio is A and B paper, dipping down into 560 and below. Meaning Toyota isn't that exposed to market troubles as its 560 paper is not "that deep," he indicated.

As for Berce, over at AmeriCredit, which is more heavily involved in the subprime arena, the story was a bit different.

"Short-term issues affect us more. It's a very difficult environment for a company like ours," he told the audience, pointing to weaker financial results in the second half of 2007.

Berce went on to say that the company has cut its loan origination expectations for 2008 to prepare for the tougher year and reduce losses.

"We've really had to hunker down," he said to McCuistion, pointing out that he's been "spending more time with funding sources and less time with the media."

AmeriCredit relies on securitizations to keep business going.

"Where we can, we will price (auto loans) up, but we need to be competitive," Berce reported. "We don't expect to get the returns we got two or three years ago."

Moving on, Bannister said he witnessed the investment community tighten up during the second half of 2007. But he highlighted that it is a seasonal trend where investors tend to tighten their purse strings every December.

"In early 2008, we saw people loosen up. Commercial paper came back, but rates are a little higher" he explained.

Looking ahead, Bannister said the market will likely remain stable.

"It's not new, this cyclical business," he pointed out.

Coming to Smith, perhaps in deference to Berce, he told the audience things are a bit different for American Honda Financial Services than an independent company. "I can't pick and choose the way an independent can," he explained.

Smith said, "We'll probably see more incentives (from captives), but we try not to follow the other companies because once this starts, it's hard to get off."

Highlighting Honda's hardest challenge, Smith said more than anything else it is managing change. "We've grown very rapidly," he stated.

For Berce, he said AmeriCredit can "pick to some extent the deals we want to work with and pick the spectrum we want to work in."

However, being an independent also has its downside, Berce said, noting AmeriCredit's toughest challenge is accessing capital.

"It's hard for someone who isn't a bank. We fund ourselves 100 percent through the securization market," he explained.

"It'll be a long time before it gets better. Probably the end of 2008 before access to capital isn't what it is today," he continued.

Commenting on AmeriCredit's leasing business, Berce said, "About 1 percent or 2 percent of our business is leasing. We're using it more strategically than as a growth leader."

Further discussing the benefits of being independent versus having more support, Borst chimed in to add, "Having our big brother in Japan is very helpful."

Also, he noted that Toyota Financial Services just started 84-month loans not long ago, which represents 4 percent of business.

"We don't promote it, but it's there for the dealer," Borst indicated, saying that basically his company wants to get consumers into the "Toyota family."

For Chase Auto Finance, it's all about the right deals, according to Sheinbaum.

Commenting on his company's biggest challenge, he said, "If anything, I'm envious of the money to do subvented deals."

When asked if he has trouble balancing his positions with both Ford Credit and the automaker side of business, Bannister responded, "I don't have a problem balancing dual objectives."

Spinning things positively, he explained that while Ford is struggling, "They (Ford) have laid out an explicit plan. Look at the vehicles currently being produced. We've got more excitement in it."

For Sheinbaum, the key to success is being cautious. He said the industry will see a pullback in higher loan to value and extended terms.

As for Chase's biggest challenge, while it's also managing growth like Honda, he also said it is battling for share.

"We're not really moving fast enough to make us stand out (from the competition)," he pointed out.

Borst said Toyota Financial Services is being competitive by bumping up folks with good credit into a higher tier, giving them better loan rates.

"We do loan money for new, non-Toyota vehicles, but we don't see the need to go as deep as we once did," he also said.

Basically, Borst said almost all companies were impacted by the tougher economic climate in the second half of last year. In talking to other CEOs in the industry, he found that shrinking originations were across the board — a tightening in subprime.

Chase saw the same trend. Additionally, Sheinbaum said his company has been seeing an increased number of consumers with lower credit scores coming to Chase for auto loans.

"We're getting more lower paper than in the past, so I assume those avenues they used to go through (for funding in the lower credit tiers) aren't working, so they're coming to us," he highlighted.

Looking to the coming year, all the executives appeared optimistic that the economy will avoid a recession and that even if one does occur, or more of a pullback happens in the auto finance market, their companies will be able to weather the tough times.

As for the rest of the event, for the most part attendees appeared to enjoy it, as well as find it informative.

"Our back-to-back format (with the National Auto Dealers Association) is gaining momentum," said Donald Gottwald, of HSBC Auto Finance, who also served as chairman of the AFSA Vehicle Finance Division and executive vice president. He sent a special thank you to the NADA executives who were on hand at the event.

This is the fifth year the conference was held just prior to NADA's annual convention and expo.

"Each year we grow in the number of exhibitors," he continued. "The number of finance-company participants also continues to increase. I'm really proud of our division's reputation and growth. We've been able to reach more members and non-members than ever before."

As for Chris Stinebert, president and CEO of AFSA, he basically told attendees that it has never been more important to put a good light on the auto finance industry..

Due to the issues in the subprime mortgage market, the "spotlight is being shined on all of consumer lending," he explained.

Editor's Note: To get a glimpse into the event, visit www.ausm.info/nada/pictures/pictures-afsa-conf.html, to see several conference photos.

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