Fitch Ratings said it has affirmed the ratings on five U.S. captive finance companies including Boeing Capital and Caterpillar Financial.

The following highlights were excerpted from the report:

• Lending growth in captives’ portfolios continued in 2014 driven by increased demand from a gradually improving global economy, improved supply of liquidity in funding markets, and slight loosening in lending standards. Average portfolio growth for the captives in this review (excluding GMF, which experienced significant growth due to an acquisition) was a healthy 3.0% in 2013 and 0.9% in 2Q/14. Fitch expects similar trends will continue to drive portfolio growth for the rest of 2014 and 2015.
• Fitch said it expects the captive landscape to get more competitive as banks increase their focus in growth areas such as auto finance and equipment finance, which will likely put pressure on pricing/margins and may lead to further loosening of lending standards.
• The benign credit environment in the U.S. has continued to benefit both consumer and commercial captives. Most captives reported net losses and delinquencies at or near historical troughs in 2013. However, Fitch believes that asset quality improvement has run its course and expects metrics to normalize as increased competition pressures underwriting standards, rising rates increase borrowers’ debt service burden, and used vehicle/equipment values continue to moderate, impacting recoveries. Average credit loss rates for captives in this review increased modestly to 0.71% in Q2/14 from 0.63% in Q2/13. Still, loss rates and delinquencies remain well below pre-crisis levels which should support solid credit performance in H2/14 and 2015.

Fitch said profitability remained strong for the captive group with average pre-tax profit margins of 29.3% in Q2/14 driven by higher financing revenues, relatively lower credit losses and lower borrowing costs. Fitch expects profitability to normalize in H2/14 and 2015 as the industry faces headwinds from tighter pricing due to increased competition, higher provision expense from normalizing credit performance, and increased funding costs in a rising rate environment.

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