Competitors have also enjoyed windfalls from their financing units, thanks to soaring used car prices and exceptionally low loan default rates. In BMW’s financial services division, the return on equity before taxes doubled last year to almost 23 percent.

Such favorable market conditions will not last, but 2022 still looks pretty good for auto loan providers. That’s fortunate, because the business of actually making vehicles is still a headache. In addition to raw material cost inflation and semiconductor supply problems, automakers now have to worry about component shortages stemming from the war in Ukraine and the rapid spread of Omicron in China and Europe.

These headwinds underscore the advantage of automakers that have financial units that can still make decent money and whose dividends can be reallocated by the parent company to investing in electric vehicles and software.

Retail and dealer financing typically accounts for between a fifth and a third of automaker revenue, but the number is currently much higher for some underperforming automakers. At Renault, for example, car financing contributed more than 70 percent to annual operating profit. No wonder Stellantis, owner of the Jeep and Ram brands, moved to create its own US financial unit last year.

One reason financing has become so viable stems directly from the cost and limited availability of new vehicles. In the past year alone, used car prices in the USA have risen by around 40 percent. In some cases, used cars cost more than the corresponding new cars because the waiting time is shorter.

As a result, leased vehicles are worth far more at the end of the contract period than the lender assumed when the contract was signed. Lessors therefore benefit from book value gains and can sell the cars returned to them for big bucks. General Motors Co. enjoyed

$2 billion in leasing profits last year, while Ford’s profit increase from leasing was about $1.5 billion. This chart of Ford lease vehicle resale values ​​helps explain why.

Another factor eroding auto finance revenues is that consumers are taking on larger loans to pay for more expensive new or used vehicles. By the end of last year, the average size of a new US vehicle loan had increased 12 percent to nearly $40,000, according to Experian, while the average used-car loan had risen to more than $27,000. Meanwhile, government stimulus checks and furlough programs have helped customers continue paying off their auto loans, and the restrictions imposed by the coronavirus pandemic meant they amassed savings as there was little else to spend.

Auto lenders have therefore been able to unwind provisions for credit and resale value losses booked at the start of the pandemic, further bolstering profit. For some lenders, loan losses turned negative over the past year because defaults were surprisingly low and the value of all collateral withdrawn rose.

Factor in low interest rates, which reduce auto lenders’ financing costs and help customers afford more expensive cars, and you can see why auto lending is so successful.

But in such a comfortable environment, there is a risk that companies will lose their vigilance. “We believe that grossly inflated asset prices create the risk of similarly inflated guaranteed future market values ​​on auto loan agreements,” Fitch Ratings warned in December.

Luckily, few automakers seem to expect conditions to remain this favorable. Most expect their financial entities’ profits to decline in 2022, albeit at still fairly high levels. VW’s financial services division is forecasting an operating profit of around 4.5 billion euros for this year.

What is new is that more consumers are exercising their right to buy their leased vehicles instead of returning them so that lessees can sell them and book the profit themselves. At GM, very few US customers returned leased vehicles until late last year.

The used car price bubble will also burst at some point. Auto loan giant Ally Financial expects used car values ​​to fall by as much as 20 percent by the end of 2023, but that could prove overly conservative given the slow improvement in available inventory.

Now that the Federal Reserve is raising interest rates, lenders’ funding costs are expected to rise, potentially pushing down the spreads they earn on low-interest-rate customer loans. Meanwhile, customer defaults could increase as pandemic support payments are reduced and household budgets are eroded by inflation.

But at least for now, the job market remains strong, and consumers will in any case tend to prioritize paying off car loans so they can get around.

The more daunting challenges are longer term. Car rental companies need to carefully consider how the shift to autonomous and electric vehicles will affect the value of the internal combustion engines they replace. Last week Germany threw its weight behind a European Union plan to ban the sale of new internal combustion engines by 2035.

I doubt the transition will be smooth, but auto lenders are at least starting this journey from an extremely comfortable position.