Ally IPO opens new options for subprime car loans

Carpenter: We have "more flexibility going forward, as regulators cut us some slack on below-660” business.
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Ally Financial’s initial public offering last week benefits dealers because Ally expects to be able to compete more aggressively for subprime business after it sheds government ownership.

“Our cost of funds will diminish” without government ownership, Ally CEO Michael Carpenter told Automotive News in a phone interview on April 10.

Ally is moving on several fronts to lower its cost of funds, such as paying off older, higher-interest debt. Another one is dropping government ownership, which imposes an extra layer of regulation. After the IPO, the U.S. Treasury still owns 17 percent of Ally, down from 37 percent before -- a holdover from the auto industry bailout in the last recession.

Ally shares started trading on the New York Stock Exchange on April 10. That makes it far easier for the government to sell its remaining share. The IPO last week consisted of 95 million shares belonging to the U.S. Treasury. The offering raised about $2.4 billion for the government.

Limits on using deposits

One side effect of government ownership is that Ally can’t use bank deposits -- an inexpensive source of funding accessible through its online banking franchise -- to fund riskier loans for customers with credit scores between 620 and 660, the auto lender said. Ally still makes loans to customers in that range, but it has to use more expensive funding sources.

Credit score ranges differ among companies, but generally, scores between 620 and 660 are at the higher end of the subprime category, sometimes called near prime.

Ally says it’s not planning any sudden moves in subprime. The company said in a filing with the Securities and Exchange Commission that subprime loans currently account for about 11 percent of its outstanding loans.

Spokeswoman Gina Proia said the auto lender is OK with its current mix of prime and subprime.

However, a lower cost of funds would provide Ally with more options. Those include higher margins on subprime business, managing margins to protect its share, or lowering margins to gain share.

‘Dealer-centric’

“What can the dealer community expect? In many ways, more of the same,” Carpenter said.

“I do think more flexibility going forward, as regulators cut us some slack on below-660” business and “things of that kind,” he said. “Our whole strategy is dealer-centric.”

You can reach Jim Henry at autonews@crain.com.

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