Overview

Finance companies, which supply credit to businesses and consumers, are often categorized as nondepository institutions, along with mortgage bankers and brokers, because they make loans without taking in deposits. They acquire funds to make these loans largely by issuing commercial paper and bonds, and securitizing their loans. As financial intermediaries, finance companies compete with banks, savings institutions and credit unions. In terms of assets, the sector is twice as large as the credit union sector, about the same size as thrifts and one-fifth as large as commercial banks. Accounts receivable—the amount of money that is owed to a business—rather than assets or revenues, determine a company’s standing within the industry.

Finance companies are diverse. Captive finance companies—which are generally affiliated with motor vehicle or appliance manufacturers—finance dealer inventories and consumer purchases of their products, sometimes at below-market rates. Consumer finance companies make loans to consumers who want to finance purchases of large household items such as furniture, make home improvements or refinance small debts. Business finance companies offer commercial credit, making loans secured by the assets of the business to wholesalers and manufacturers and purchasing accounts receivable at a discount. Increasingly, finance companies are participating in the real estate market. They also offer credit cards and engage in motor vehicle, aircraft and equipment leasing.

Mergers and Acquisitions

Banks were sellers in five of the 10 largest mergers involving sales of North American finance companies in 2011. The largest finance company deal of 2011 was U.K.-based HSBC’s sale of its U.S. credit card and retail services to Capital One for $33.9 billion. Other large transactions included the sales of finance businesses by Bank of America, Morgan Stanley, Goldman Sachs and Lloyds Banking Group (see chart, page ___).

 

TOP TEN SPECIALTY LENDER MERGERS AND ACQUISITIONS, 2011 (1)

($ millions)

Rank Buyer Buyer's industry Seller Target Deal value (2)
1 Capital One Financial Corporation  Bank HSBC Holdings Plc. (U.K.) U.S. credit card and retail services business of HSBC $33,884.0
2 Toronto-Dominion Bank Bank Bank of America Corporation MBNA Canada's credit card business 7,500.0
3 Ocwen Financial Corporation Specialty lender Morgan Stanley Servicing business and assets of Saxon Mortgage Services 1,451.3
4 Investor group Not classified Investor group GE SeaCo SRL 1,048.0
5 Walter Investment Management Corp. Investment company Centerbridge Partners L.P. GTCS Holdings LLC 1,047.0
6 Standard Chartered Plc Not classified General Electric Capital Corporation GE Money Pte. Ltd. 692.0
7 Ocwen Financial Corporation Specialty lender Goldman Sachs Group, Inc. Litton Loan Servicing LP and IO Strips 263.7
8 Ryder System, Inc. Specialty lender Lloyds Banking Group Plc Hill Hire plc 253.3
9 American International Group, Inc. Insurance underwriter AerCap Holdings N.V. AeroTurbine, Inc. 228.0
10 Fortress Investment Group LLC Asset manager BAE Systems Plc BAE Systems Asset Management 187.0

(1) Target is a U.S. or Canada-domiciled specialty lender. List does not include terminated deals.
(2) At announcement.

Source: SNL Financial LC.

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ASSETS AND LIABILITIES OF FINANCE COMPANIES, 2007-2011 (1)

($ billions, end of year)

  2007 2008 2009 2010 2011
Total financial assets $1,911.2 $1,851.7 $1,662.5 $1,590.0 $1,546.5
Checkable deposits and currency 16.2 16.5 17.0 15.3 15.7
Time and savings deposits 48.6 49.4 51.0 45.9 47.1
Credit market instruments 1,816.3 1,734.4 1,516.7 1,539.2 1,488.1
     Corporate and foreign bonds 189.4 192.4 198.6 179.0 183.8
     Other loans and advances 523.0 539.9 448.9 441.0 433.8
     Mortgages 531.9 447.9 397.4 344.2 303.2
     Consumer credit 572.1 554.3 471.9 575.0 567.3
Miscellaneous assets 30.1 51.5 77.8 -10.4 -4.5
Total liabilities $1,949.6 $1,880.5 $1,630.3 $1,536.7 $1,482.1
Credit market instruments 1,279.6 1,200.3 1,044.1 962.1 915.3
     Open market paper 123.5 100.9 62.1 63.8 61.4
     Corporate bonds 974.1 924.5 837.5 818.7 774.9
     Depository institution loans 182.0 174.9 144.5 79.6 79.0
Taxes payable 15.5 15.4 12.7 12.9 12.9
Miscellaneous liabilities 654.4 664.8 573.6 561.7 553.8
     Foreign direct investment in U.S. 68.6 78.1 75.0 83.6 91.8
     Investment by parent 321.4 313.0 280.5 264.6 267.5
     Other 264.4 273.7 218.1 213.5 194.5
Consumer leases not included above (2) 122.9 111.1 85.4 72.7 77.9

(1) Includes retail captive finance companies and mortgage companies.
(2) Receivables from operating leases, such as consumer automobile leases, are booked as current income when payments are received and are not included in financial assets (or household liabilities). The leased automobile is a tangible asset.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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FINANCE COMPANY EMPLOYMENT, 2008-2012

(000)

  2008 2009 2010 2011 2012
Nondepository credit intermediation   632.7 571.5 561.7 559.3 569.7
     Credit card issuing   108.1 101.5 99.6 102.8 107.2
     Sales financing   104.9 91.4 82.1 78.0 80.5
     Other nondepository credit intermediation   419.7 378.7 380.1 378.5 382.0
          Consumer lending   109.9 97.0 91.0 86.9 90.6
          Real estate credit   225.8 200.0 206.5 207.0 203.5
          Miscellaneous nondepository
          credit intermediation
 
84.1 81.7 82.6 84.5 87.9

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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BUSINESS AND CONSUMER FINANCE COMPANIES' RETURN ON EQUITY, 2007-2011 (1)

  Business finance companies'
return on average equity (2)
Consumer finance companies'
return on average equity (3)
Year Median Average Median Average
2007 11.70% 15.67% 11.61% -5.76%
2008 9.38 -2.39 5.31 13.84
2009 6.61 2.89 7.37 -1.96
2010 7.81 5.95 14.12 3.22
2011 9.33 7.19 13.73 11.96

(1) Net income as a percentage of average equity.
(2) Includes 34 public and private commercial lenders; excludes government-sponsored enterprises (GSEs), mortgage real estate investment trusts (REITs) and real estate companies.
(3) Includes 38 public and private consumer lenders; excludes GSEs, REITs and real estate companies.

Source: SNL Financial LC.

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