Subprime rebounds; Ally tops lenders in Q4
Photo credit: BLOOMBERG
Subprime auto financing is on the rebound, new data from Experian Automotive show.
Experian's data, released last week, also show that Ally Financial Inc. overtook Chase Auto Finance in the fourth quarter last year as the nation's biggest auto lender for new and used vehicles combined.
Separately, Ally said it expects continued growth in tandem with former parent General Motors. But Ally is also pursuing business with other brands in used cars, leasing and subprime.
For the most part, all are good indications of better credit availability in 2011, which in turn could lead to more vehicle sales and F&I profits for dealerships.
First down, last up
Subprime was the first auto loan segment to hit the skids in 2008 and the last to benefit from easier access to credit in 2010.
In the fourth quarter of 2010, subprime grew as a percentage of overall loans from the year-earlier level, the second quarter in a row that happened. When it happened in the third quarter of 2010, it was the first time in three years that subprime showed a year-over-year gain, according to Experian data.
Melinda Zabritski, director of automotive credit for Experian, said in a phone interview that the subprime segment -- comprising the nonprime, subprime and deep subprime categories -- accounted for 20 percent of new-vehicle financing in the fourth quarter last year, compared with 17 percent in the year-earlier period. That was comparable to the fourth quarter of 2008, but well below previous highs, she said.
"I don't think you're going to see it go back where it was in 2007," she said, when subprime accounted for as much as 27 percent of auto loans.
Experian divides the subprime credit risk segment on the VantageScore scale into these score ranges: deep subprime, 501 to 600; subprime, 601 to 640; and nonprime, 641 to 700.
At the American Financial Services Association Vehicle Finance Conference in San Francisco last month, dealers in a panel discussion complained that the high and low ends of the subprime segment are still underserved.
Dealers said in particular that lenders should do more to accommodate customers whose credit scores suffered in the recession, even though they made their car payments on time.
On the rebound
Ally's move to the top of the 2010 automotive lenders' tables was the culmination of a comeback that was building all year. "Ally is in a very dominant market position," Zabritski said.
Ally, the former GMAC Financial Services, rebounded in 2010 from the U.S. recession, the credit crisis and the 2009 bankruptcy of General Motors. Key factors in its market share increase include:
Cheaper funds. Ally became a bank holding company as part of its U.S. government bailout at the tail end of 2008. Since then, by funding more loans from customer deposits, it has been able to lower the rate at which it borrows money to make new loans. Ally also recently secured higher credit ratings, which also will serve to lower its cost of funds.
Cutting its losses. Ally has cut way back on its troubled subprime mortgage business, which was clobbered by the falling housing market. Compared with subprime mortgages, auto loans remained relatively healthy in terms of delinquencies and defaults. Getting out of subprime mortgages makes Ally more profitable and better able to focus on its automotive business.
Recovering automaker partners. Ally is the preferred lender for both GM and Chrysler Group. Both saw an increase in sales in 2010. Ally increased its penetration of retail loans and leases written for those brands, capturing a bigger share of a bigger number.
No. 1 Ally had about a 7 percent share for combined new- and used-vehicle loans originated in the fourth quarter, Experian said. Former No. 1 Chase Auto Finance fell to No. 4 for the quarter, with a 5 percent share, behind used-vehicle specialist Wells Fargo Financial Services and Toyota Financial Services.
Ally had already passed Chase for the No. 1 spot in new-vehicle loans, for loans originated in the third quarter.
Meanwhile, Chase Auto Finance is emphasizing a strategy of "returns first, growth second." That's according to remarks in a presentation for investors and analysts last month by Charlie Scharf, CEO of Chase Retail Financial Services, the unit of JPMorgan Chase and Co. that includes Chase Auto.
Even though Chase Auto's share fell in the fourth quarter, Chase didn't cut back sharply on originating new loans for the full year. Rather, Chase's share fell as loan originations by rivals such as Ally grew. For all of 2010, Chase reported its auto loan originations declined only about 3 percent to $23 billion.
Ally said it financed $31.6 billion in consumer auto contracts in the United States in 2010, including new and used, loans and leases.
You can reach Jim Henry at firstname.lastname@example.org.