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

Average net loss rates for the peer group inched up slightly to 0.65% in 2014 from 0.63% in 2013.

Underpinned robust credit quality

Despite the increase, net losses remain 13 bps below a more normalized (five-year historical average) level of 0.78%. 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.

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

Pretax profit margins for the group remain solid, averaging almost 30% across the US group, down from about 31% in 2013.

GM Financial saw a meaningful decline in its profitability to 16.8% in 2014 from 26.4% in 2013, reflecting the asset-mix change to low-return, low-risk prime and commercial loans from high-return, high-risk subprime loans.

Conversely, American Honda Finance Corporation's (Honda Finance) and Toyota Motor Credit Corporation's (Toyota Credit) pretax margins increased from 2013 levels, which was largely attributable to hedging gains from the US dollar strengthening against the euro and the yen.

Across captive fincos, 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 6.7x for the peer group at Dec. 31, 2014.

Relatively stable economic conditions in the US have led to good auto sales and good portfolio growth among US captives. Average portfolio growth was 5.5% 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's leasing international operations that year.

US 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% from 15.5 million units in 2013.

Although not yet returning to precrisis levels, Fitch has observed a modest increase in captive fincos' use of short-term funding over the last several years. Short-term debt accounted for no more than 20% total debt in 2014 for all captives, with the exception of Honda Finance and Toyota Credit, which had 22% and 31%, 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.

Positively however, Fitch reports captive fincos maintain committed third-party liquidity support to reduce the impact of funding disruptions.