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What You Should Know about Deere’s Financial Services Unit

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Deere financial services sales and margins

Deere & Company’s (DE) captive financing entity, also known as its financial services (FXO) segment, generated revenues of $2.3 billion, $2.6 billion, and $2.6 billion, respectively, in 2013, 2014, and 2015. These figures correspond to 6.3%, 7.5%, and 9.1% of DE’s revenues in the respective years.

Operating margins in DE’s financing segment were 37%, 35.6%, and 37.1%, respectively, in 2013, 2014, and 2015. As is the case with all financing entities, operating margins are quite high and result from deducting interest expenses from interest income. Operating expenses for financing entities are majorly administrative in nature.

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Net interest margins

Since DE’s financing segment’s profitability is based on interest income from its financing equipment to customers, net interest margin (or NIM) is an appropriate performance metric by which to analyze the segment on a standalone basis.

NIM is determined by dividing net interest income by the average earnings assets of the financing entity. NIM is the spread between interest earned and interest expended by a financing unit. Deere’s NIMs were 3.1%, 3.1%, and 3.0%, respectively, in 2013, 2014, and 2015.

Among DE’s competitors, Caterpillar (CAT) does not provide NIM details on its filings. CAT’s operating margins in its captive financing unit fell from 33% in 2013 to 24.3% in 2015 as write-offs increased in its marine and mining portfolios.

Comparison with major banks

Among major banks (IYG), JPMorgan Chase’s (JPM) NIM has hovered between 2.1% and 2.8% in the last five years, primarily due to the nature of its loan portfolio.

Wells Fargo’s (WFC) NIM ranged between 2.9% and 3.9% from 2011 to 2015. Banks don’t make for good comparisons with DE. Their businesses are majorly composed of mortgages, which are different from equipment manufacturers. However, banks do compete for equipment loans, so we’ve included them in our analysis.

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