Ally Financial IPO means freedom to make more auto loans, more risk

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NEW YORK (Bloomberg) -- The U.S. Treasury Department has had Ally Financial Inc. in a regulatory headlock since its 2008 bailout. As the government sells shares in an initial public offering, Ally will soon breathe again -- and take on more risk.

Treasury’s exit will let Ally make more auto loans to borrowers with lower credit scores from its commercial bank unit, according to a prospectus issued last month. The Detroit lender run by CEO Michael Carpenter is set to price its shares today and could raise as much as $2.7 billion.

“Once the IPO is completed and the U.S. government has been repaid, the company will have more wherewithal to grow Ally Bank and enhance its profitability,” said Mark Palmer, an analyst at BTIG LLC in New York.

Ally, whose biggest shareholders also include Third Point LLC, the hedge fund run by Daniel Loeb, counted 16,000 U.S. car dealerships as customers at year-end, the filing showed. Ally securitizes dealer loans for sale to institutional investors.

Ally Bank

The Ally Bank unit had 1.5 million accounts and $52.9 billion of deposits as of Dec. 31. It does direct banking over the Internet and by phone. The government currently requires that the company fund its subprime loans through Ally Financial instead of Ally Bank, increasing the amount of higher-cost unsecured debt.

“We believe that over time these requirements will normalize relative to other banks and have a favorable impact on our financial performance,” Ally said in the filing.

Subprime loans have grown to 11 percent of Ally’s portfolio, the company said in its prospectus. Increasing its share of subprime could be a credit risk, said Jesse Rosenthal, an analyst at CreditSights Inc.

Ally has been “reaching down the credit spectrum on underwriting,” Rosenthal said by phone from New York. “It’s really reflective of the strength of the auto asset class, but it’s still a risk.”

Government rescue

Ally can exit the bailout by the end of the year and “hopefully before that,” Carpenter said on a Feb. 6 conference call. Adam Hodge, a Treasury spokesman, and Ally’s Gina Proia declined to comment on the IPO.

Ally, known as GMAC when it was the finance arm of GM, won Federal Reserve approval to become a bank holding company in December 2008. The change enabled it to tap the U.S. rescue, which swelled to $17.2 billion. Treasury said on March 27 that it has recouped $15.3 billion from Ally.

Ally has had a “long and extensive historical relationship” with GM, which accounted for 39 percent of its loans and leases last year, according to the prospectus. Ally’s ties to GM may pose risks as the automaker faces federal investigations into its recall of 2.6 million cars that were linked to at least a dozen deaths.

The government plans to pare its holding to 17 percent from 37 percent by selling 95 million shares for $25 to $28 apiece, according to the latest filing. That would put Ally’s market value at as much as $13.5 billion, data compiled by Bloomberg show.

Ally’s bankers

Underwriters have the option to buy more than 14 million shares. Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc are handling the IPO, Ally said.

The bailout overhang won’t disappear completely after the offering. In its prospectus, Ally outlines its risks, many of which are tied to regulation.

Ally agreed to pay a record $98 million to settle U.S. Justice Department and regulatory claims that it helped car dealers inflate the cost of auto loans to African-American and Hispanic borrowers. The firm also remains subject to the Fed’s annual stress tests.

Carpenter, 67, has refocused the company on its auto lending roots since he took the helm in 2009. Ally lost 15 percent of total new loan share in the fourth quarter, making it the third-largest U.S. lender, according to Experian Plc, a research firm that analyzes auto finance. Wells Fargo & Co. was No. 1, followed by JPMorgan Chase & Co.

Santander consumer

Ally’s competitor, Santander Consumer, remained profitable during the financial crisis and never needed a bailout. Last year, Dallas-based Santander became the preferred provider of auto loans for Chrysler Group LLC, replacing Ally.

The auto lending unit of Banco Santander SA sold shares in a U.S. IPO in January, raising $2.1 billion. “Ally Financial is starting from a much lower base whereas Santander Consumer was still profitable during the crisis,” BTIG’s Palmer said. “They’re different animals and becoming public companies from different jumping-off points.”

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