Rising U.S. interest rates likely to dent automakers' earnings

Wed Dec 16, 2015 1:02pm EST
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By Dan Freed

(Reuters) - Rising U.S. interest rates could cut into car makers' profit margins over the next year and eventually take some of the steam out of auto sales and car loans, analysts say.

The Federal Reserve is expected to raise its overnight lending rate on Wednesday for the first time since 2006, and economists predict another three to four hikes by the end of 2016.

As soon as the central bank tightens, higher rates will make it more expensive for companies like Ford Motor Co and General Motors Co and their finance arms to fund themselves in the bond markets. They will struggle to pass many of those extra costs on to consumers because of competitive pressure.

U.S. banks, in contrast, will not likely face higher funding costs after the Fed raises rates once or twice, which will allow them to keep the rates they charge on auto loans more or less unchanged. To compete, auto makers will likely have to keep their rates similarly low, which will squeeze their margins on loans.

"Is it going to impact the margins for auto makers because their funding costs are rising slightly? I think it certainly will," said Michael Yoshikami, CEO of Destination Management, which oversees $1.5 billion in assets.

For consumers, even if auto loan rates rise a percentage point, demand for cars and trucks should stay strong, lending executives say. On a $30,000 loan, a 1-percentage-point rate increase translates to an extra $16 per month in interest payments for the average consumer, said Pete deLongchamps, vice president of financial services at auto dealer chain Group 1 Automotive.

Over time, higher rates could slow the recent torrid demand for new cars. U.S. car and truck sales are on pace for a record year in 2015.

Consumers are "more buying a payment than they are buying a car price," said Mark Wakefield, a consultant with AlixPartners. "It's not like consumers are going to be able to turn around tomorrow and afford significantly higher payments."   Continued...

Cars are lined up for sale at a Ford dealer in Lakewood, Colorado in this September 4, 2013 file photo. REUTERS/Rick Wilking