By Mike Colias and John D. Stoll 

General Motors Co.'s sale of Adam Opel AG likely eliminates a source of low-cost funding for the Detroit auto giant's car-lending business, potentially pressuring profits in lending operations the company has been trying to rebuild since bankruptcy.

GM, expected to outline terms Monday of its agreement to sell its money-losing Opel to France's Peugeot , has collected nearly $2 billion from retail customer deposits since late 2015 for use in global lending. The catch: those funds were deposited in the so-called Opel Bank, an online bank that operates only for residents of Germany.

The auto maker is relying on GM Financial, which has access to Opel Bank funds, as a growing source of profits in coming years. A relative newcomer to auto finance after being created in the years after GM's 2009 bankruptcy, access to lower-cost funding is important to helping GM Financial catch up to Ford Motor Co.'s Ford Credit, which makes far more money than GM's lending unit.

The retail banking operation, likely to remain a part of Opel due to the way it operates, has given GM access to less-expensive financing than traditional methods. Opel Bank advertises rates that are relatively attractive for prospective customers, but the interest it pays on retail deposits can be less than what it can borrow on an unsecured basis in the wider market.

"It's an attractive source of funding partly because it's sticky -- once a retail customer deposits in a bank account, they're usually not in a hurry to pull that money out," Amiyatosh Purnanandam, a finance professor at the University of Michigan, said.

Peugeot, officially known as Group PSA SA and holding about 10% of the European market, operates a finance arm as well. PSA Finance also runs a bank in Germany.

Selling Opel represents a surrender flag for GM after nearly two-decades of trying to turn a profit in European operations.

Analysts say GM ridding itself of a division that hasn't posted a profit since before 2000 -- and lost nearly $20 billion since then -- will improve free cash flow and allow GM to focus more on the U.S. and China, where it generates all of its profits. It also could funnel the more than $1 billion in capital spent in Europe on self-driving vehicles and other innovation.

Still, the divestiture carries risk.

GM would be the only one of the top five global auto makers without a presence in Western Europe, the world's third-largest automobile market. GM risks missing out on steadily-improving conditions in Europe at a time when the U.S. and Chinese markets are thought to be at or near their peaks, RBC Capital analyst Joseph Spak wrote in an investor note Friday.

The $1.9 billion in Opel Bank only represents less than 10% of the debt GM Financial secures annually. GM Financial lends money to car buyers and dealers. But retail bank assets generally are prized as a low-cost and relatively stable funding source, Mr. Purnanandam said.

Opel Bank has grown rapidly since GM began taking deposits in the third quarter of 2015, with the bank's assets tripling its size over the course of about 18 months. "We actively monitor the capital markets and seek to optimize our mix of funding sources to minimize our cost of funds," GM Financial said in a regulatory filing last month.

GM exited the auto and home-lending business ahead of its bankruptcy restructuring by unloading the former GMAC, which was renamed Ally Financial Inc. In 2010, GM spent $3.5 billion to acquire subprime lender AmeriCredit Corp., and has gradually cut ties with Ally.

Dealers have said GM has been at a disadvantage in recent years without a powerful in-house lender that can meet most customers' finance needs. But executives believe GM Financial's expanded offerings are helping the auto maker retain more customers.

For example, in 2015 GM Financial took over as the GM's exclusive lender for leases. It often offers special deals to owners whose leases are expiring.

The auto maker has said GM Financial is poised to become a bigger contributor to the bottom line in coming years. It generated $913 million in pretax profit in 2016, or 7% of GM's total global profits. Ford Motor's credit arm had pretax profit of $1.9 billion, a much bigger contributor to Ford's bottom line.

Write to Mike Colias at Mike.Colias@wsj.com and John D. Stoll at john.stoll@wsj.com

 

(END) Dow Jones Newswires

March 05, 2017 10:13 ET (15:13 GMT)

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