Cat Financial originations declined in the first quarter due to high interest rates leading to more cash deals and increased competition from banks.
Cat Financial, the finance subsidiary of equipment manufacturer Caterpillar, posted $2.5 billion in Q1 originations, a decline of 10.6% quarter over quarter and 11.3% year over year, according to the earnings supplement. “New business volume declined compared to the first quarter of 2022,” Chief Financial Officer Andrew Bonfield said during the company’s earnings call Thursday. “This was expected as high interest rates drove more cash deals and increased competition from banks.”
“In a rising interest rate environment, banks are able to provide more competitive interest rates than Cat Financial, and we tend to lose some share of the machines finance,” Bonfield said. “In the event of a slowdown in lending from regional banks, we are well-positioned to step in and fund credit-worthy customers so they can purchase their machines.”
Cat Financial’s total outstandings clocked in at $32.2 billion, up 0.8% QoQ, but down 1.2% YoY, according to the supplement and analysis by Equipment Finance News.
Caterpillar Financial Products’ revenue, which includes Cat Financial and Caterpillar Financial Insurance Services revenue, was $902 million, a 15.2% YoY increase, according to the earnings release.
Cat Financial Q1 revenue tallied $768 million, up 6.1% QoQ and 17.8% YoY. Caterpillar Financial Insurance Services, which offers extended protection for equipment and insurance for equipment and business, logged revenue of $134 million, an increase of 3.9% QoQ and 2.3% YoY, according to an Equipment Finance News analysis of the earnings supplement.
Cat Financial Products Q1 profit fell 2.5% YoY to $232 million.
“The slight profit decrease was mainly due to unfavorable impacts from equity securities, currency exchange losses and multi-mark adjustments on derivative contracts,” Bonfield said. “However, high net yield on average earning assets and low provision for credit losses acted as a partial offset.”
Cat Financial expects regional banks tightening credit conditions to be an opportunity to increase its penetration rate, Bonfield said.
“It’s too early to see any impact yet from any tightening credit conditions within the regional banks, but our expectation is that that may have an impact between 5% and 10% percent of machines financed, which we could add,” he said.
Delinquencies tick down 5 bps YoY
Cat Financial’s past-due accounts clocked in at 2% at the end of Q1, up 11 basis points (bps) QoQ but down 5 bps YoY, according to the supplement. “This is the lowest first quarter past due percentage since 2006,” Bonfield said.
Write-offs net of recoveries landed at $10 million in Q1, representing 0.03% of the total portfolio, down 11 bps QoQ and up 1 bps YoY, according to an EFN analysis. Allowance for credit losses in Q1 was $348 million, or 1.27% of finance receivables, down 2 bps from Dec. 31, 2022, according to the supplement. Cat Financial’s current credit profile and funding provide the subsidiary with the means to compete with regional banks, Bonfield said.
“Cat Financial has strong liquidity and broad access to funding,” he said. “We are funded through the wholesale debt markets rather than from customer deposits, and we match assets and liabilities based on duration, currency and interest rate profile.”
Construction, resources sales elevated YoY
Consolidated North American sales revenue totaled $8 billion in Q1, up 0.2% QoQ and 29.5% YoY, according to the supplement.
Caterpillar Construction’s Q1 North American sales revenue was $3.6 billion, an increase of 32.7% YoY, according to the company’s earnings release. Caterpillar Resources, meanwhile, reported North American sales revenue of $1.3 billion, a 28.5% YoY increase.
“Supply chain improvements enabled stronger-than-expected shipments in North America, supporting the dealer restructuring in the region,” Bonfield said. “This is a positive as North America continues to be our most constrained region from a dealer inventory perspective.”
While the supply chain continues to improve, there are still some areas of concern, Caterpillar Chief Executive James Umpleby III said during the call.
“Because of easing supply chain constraints in some areas, lead times have improved, but we still have challenges in certain areas,” he said. “We have challenges around availability and lead times around some building construction products as well as excavation, but we are making some changes … that will have an impact on production.”
Shares of Caterpillar Inc. [Nasdaq: CAT] were trading at $214.33 at market close Thursday, down $1.86 or 0.86% from market open. Caterpillar has a market capitalization of $110.67 billion.
