EUR 850.00 For Business Accounts Only

Morningstar | SMFG’s Sale of Mazda Finance Business Would be in Line with Recent Moves to Reduce Noncore Assets

Sumitomo Mitsui Financial Group, or SMFG, is in advanced talks to sell its 51% stake in SMM Auto Finance (49% owned by Mazda Motors) to Toyota Finance Corp for an undisclosed price. We maintain our no-moat rating and our fair value estimate for SMFG remains JPY 5,960, which is 37% above the current share price.

Similar to the deal SMFG reached last year to sell controlling stakes in two regional banks to Kansai Mirai Financial Group, this sale would deconsolidate a noncore asset acquired in past assistance to a struggling counterparty that lacks long-term strategic merit for SMFG and consumes capital. While this disposal, being relatively small, will not improve SMFG’s capital ratios to the same degree as the Kansai regional-bank sale or SMFG’s forthcoming deconsolidation of Sumitomo Mitsui Finance & Leasing, or SMFL, to be achieved by selling 10% to Sumitomo Corp, it is nonetheless positive to see SMFG’s continued efforts to reduce its risk-weighted assets, thereby raising capital ratios and increasing room for future dividend payments.

SMM Auto Finance has been relatively unique among Japanese automakers’ captive finance units in that was formed as a joint venture between Mazda and SMFG rather than as a wholly owned unit of the automaker. This situation arose because Mazda’s previous captive finance unit became a wholly owned unit of Ford Motor Credit during the period in the 1990s and 2000s when Ford was gradually increasing its stake in Mazda, but by 2008 Ford decided to gradually divest itself of Mazda to streamline its own assets. Because Ford wanted to sell the finance unit in 2008 and Mazda lacked sufficient capital to buy it outright, SMFG stepped in at the time to support Mazda. Mitsubishi Motors had a similar situation with MMC Diamond Finance, which had been 50% owned by Mitsubishi UFJ Lease until April 2018 when Mitsubishi Motors finally had the financial wherewithal to buy out the leasing company’s stake and make MMC Diamond Finance fully owned.

We estimate that the market for auto loans in Japan is near JPY 10 trillion in size, of which automakers’ captive finance units account for around half (close to 20% for Toyota Finance, 10%-15% each for Nissan Financial Services and Honda Finance, and 2%-3% each for Subaru Finance, Suzuki Finance, and SMM Auto Finance). Nonbank credit companies account for most of their other half, including the portion for which these companies provide guarantees to commercial banks. Of these, Orico is the largest, accounting for around 20% of the auto loan market including securitized loans no longer on its balance sheet. Other players include JACCS, Cedyna, and Aplus. Orico is an affiliate of Mizuho Financial Group, JACCS an affiliate of Mitsubishi UFJ Financial Group, while Cedyna is a wholly owned unit of SMFG and Aplus is 97% owned by Shinsei Bank. In contrast to the automakers’ captive finance units, which mainly provide credit for new vehicles purchased at dealerships, the nonbank credit companies also finance used vehicles at higher interest rates.

Separate to the auto-loan market, the market for leased vehicles in Japan is relatively small, as fewer than 5% of vehicles, mostly corporate-owned ones, are leased. We estimate its total market size as being smaller than JPY 2 trillion, with Orix Auto being the largest player (around 38% share), followed by Sumitomo Mitsui Auto Service (22%) and Nippon Car Solutions (17%). After SMFL’s acquisition of the former GE Japan leasing business, Sumitomo Mitsui Auto Service is 47% beneficially owned by Sumitomo Corp (34% directly and 13% through SMFL), 35% by SMFG (22% directly and 13% through SMFL) and 18% by Hitachi Capital. Nippon Car Solutions is a 60-40 joint venture of leasing firm Tokyo Century and NTT, and has a strength in providing vehicles to the telecom company.