Ally Financial and Wells Fargo Dealer Services, two of the nation’s largest auto lenders, say growing competition has them ready to sacrifice market share to protect profits.
Both companies lead segments of the market, according to Experian Automotive. Ally Financial was No. 1 in combined U.S. new- and used-vehicle loan originations in the third quarter of 2014. Wells Fargo Dealer Services was No. 1 in used-vehicle financing in the third quarter.
Still, being the volume leader isn’t the goal, the lenders’ chief executives said in separate presentations at the Goldman Sachs U.S. Financial Services Conference 2014 in New York last week.
“The competitive environment remains tough,” said Michael Carpenter, CEO of Ally Financial. “Our goal here is not to be the biggest. We happen to be the biggest at the moment. Our goal is not to be the biggest; it is to do business that is profitable and that reinforces the strength of our franchise.”
John Stumpf, CEO of Wells Fargo Dealer Services, made similar remarks. “I don’t have a chart where it says Wells Fargo must be No. 1 in this business,” he said. “What we must do is do a good job and make sure that we have proper risk and return.”
Stumpf said it’s easy for other lenders to gain share in auto lending.
Indeed, auto sales are on the rise, auto loan performance is good in terms or delinquencies and loan losses, and credit is widely available.
“This is an asset class from a lending perspective that has very few barriers to entry,” Stumpf said. “If you have a phone and a fax machine, and you can say yes, you can be in this business. Now, it’s a bit more complicated than that, but it doesn’t have a lot of the barriers.”
Stumpf and Carpenter each said separately that competitive advantages for their respective banks include experience and a long-term commitment to auto lending.
Carpenter said incentives from General Motors boosted Ally Financial’s volume in 2014. He said the company now expects about $41 billion in total U.S. originations in 2014, up from an earlier forecast of $37 billion to $38 billion. The extra volume will be the result of “a lot of aggressiveness in the subvented programs,” he said.
Ally Financial has been touting for a while that it’s less dependent on subvention, although lately it has actually gained share in subvented volume. That was not in Ally’s original plan for the year, Carpenter said.
He said Ally expects to lose some of its GM share as the automaker’s captive, GM Financial, ramps up new products, including prime-risk loans. Carpenter said Ally expects to offset lower GM share with a continued increase in used-vehicle financing and financing for non-GM and non-Chrysler dealers.
“We’re not worried about [losing GM business],” Carpenter said, adding, “but don’t be surprised if you see that happen.”