Despite an overall drop in auto originations resulting from a loss of some GM business, Ally Financial’s third-quarter financial results were positive, Ally executives say.
Ally said it gained in all business channels in the quarter save its General Motors subvented loan and lease business, part of which GM is shifting to its captive GM Financial. And with more brand relationships, increased subprime lending and reduced focus on GM, Ally is fostering a more independent image in auto lending than it had when GM accounted for a large part of its business, Ally executives said.
Ally’s overall third-quarter auto loan and lease originations dropped 6 percent compared with the year-earlier period. The decline reflects GM’s decision to begin using GM Financial as its sole provider of subvented leases beginning this year, taking business from Ally.
Ally’s GM subvented loan and lease business fell 83 percent in the third quarter, driving the 6 percent drop in Ally’s overall originations.
Excluding the hit it took from GM Financial’s lease exclusivity, Ally’s auto originations rose during the quarter, the lender said. Originations in its Chrysler channel, GM non-subvented channel, and channel of business outside of those two automakers jumped 36 percent combined, Ally said.
Ally now expects to exceed $40 billion in total originations this year, surpassing its previous forecast in the high $30 billions, executives said during a conference call last week. Ally had set its previous goal before GM detailed plans to steer all subvented leases to GM Financial, Ally said.
“Ally’s third-quarter results demonstrate the ongoing strength of the operations and continued progress on our goals to diversify the business, achieve our financial targets and build upon our leading digital platform,” Ally CEO Jeffrey Brown said in a statement last week. The business is well-positioned in the marketplace, increasingly more diversified and poised to provide consistent returns.”
Ally began diversifying its lending activities about two years ago, and “those efforts accelerated in the back half of 2014,” Brown said. “A couple years ago, we were concentrated into one or two manufacturers,” Brown told Automotive News last week, referring to Ally’s early focus on GM and Chrysler. “We were not comfortable with that.”
This year Ally became the preferred U.S. lender for Aston Martin dealerships and for Mitsubishi Motors Corp. stores.
Ally’s non-GM and non-Chrysler business, what it refers to as its growth channel, which also includes the Ford, Nissan, Hyundai, Kia, Toyota, Maserati and Honda brands, increased 46 percent in the third quarter to $3.5 billion.
Those growing relationships show that the brands think of Ally as an independent lender, rather than one attached to GM, Brown said, adding that Ally doesn’t want to be “solely concentrated with any nameplate.”
“We’re always out trying to prove to other manufacturers the strength of the Ally nameplate,” Brown said. “It ties back to what happened with GM throughout this year where the manufacturers truly view us as independent.”
“It enables us to get in the door in spots where we previously could not,” he said.
Ally’s business with Chrysler, though, remains strong. Ally’s Chrysler loan and lease originations grew to $2.7 billion in the third quarter, up 38 percent compared with the year-earlier period. One reason for the robust Chrysler business, said Ally CFO Chris Halmy, is that Chrysler allows Ally to compete with Chrysler Capital. By contrast, GM Financial “is getting more exclusive rights,” he said.
“We can show strength of our business model when we can compete,” he said. When dealers have a lender they enjoy working with, they tell the manufacturers. Chrysler dealers have been a vocal supporter of Ally, he said.
Another change for Ally is increased lending to nonprime borrowers. Nonprime lending was still moderate in the third quarter at 13.5 percent of nonprime originations. That’s about a 5-point increase from the third quarter of 2014, but Ally said it is lending to consumers on the higher end of the nonprime spectrum. Ally defines nonprime as credit scores of 620 or lower.
Considering the downsizing of Ally’s lease business and, in effect, less residual risk, “the uptick” in nonprime “made a lot of sense,” Halmy said.
Despite the rise in nonprime business, though, Ally continues to focus on the borrower’s ability and willingness to pay, Brown said.
Added Halmy: “It’s all about risk-adjusted spreads. You need to make sure you are getting paid.”