Ally Financial, one of the top auto lenders in the U.S., increased its lease originations in the first quarter. But rather than aggressively seeking growth in its leasing business, Ally is prioritizing used-vehicle financing, executives said during the company’s first-quarter earnings call last week.
“It’s important as a dealer-focused company to maintain a strong level of business on behalf of the dealers in used as their used inventories grow,” Andrea Riley, chief marketing officer, told Automotive News. “There aren’t a lot of lenders that will actually do used-car financing. So for us, being strong, consistent and relevant there is really important.”
In a couple of years, Ally expects its retail loan portfolio to be nine to 10 times larger than its lease portfolio.
Used, leases grow
Ally’s used-vehicle loans increased 2.4 percent to $4.2 billion in the first quarter, while its lease penetration rose 12.5 percent to $900 million, the lender said in releasing its first-quarter results. Despite the rise in leasing, it still made up only 10 percent of originations vs. 8.8 percent in the first quarter of 2016.
Used-vehicle loans made up 47.2 percent of Ally’s origination portfolio at the end of the quarter, vs. 45.6 percent a year earlier.
Used-vehicle financing also helps Ally remain competitive as incentives through automakers’ captives increase for new-vehicle sales, Riley said.
“As we look to diversify our portfolio on the auto side and make sure we’re remaining competitive in the marketplace and doing business across all [automakers], all dealers -- that’s an important strategy,” she said. “As [automakers] rely in incentive periods more on their captives, it is important for us that we have a position to go to.”
Ally, which previously acted as captivelike lease provider to General Motors and Chrysler brands, is becoming less exposed to residual risk with a small lease portfolio, CEO Jeffrey Brown said on the investors call last week. But “don’t get me wrong,” he added. “We like the leasing product, given proper industry fundamentals.”
Ally was prepared for a decline in used-vehicle prices, executive said.
“We’ve been saying for a few years that we expect used-vehicle prices to come down [as the] supply of off-lease vehicles continues to increase,” Brown said.
As inventory levels, lease penetration and incentives increased in the first quarter, used-vehicle values fell about 7 percent from year-earlier levels, he said. “We’ve been adjusting our residuals for several years, so this isn’t unexpected to where we set residuals three years ago,” Brown said.
Used-vehicle volume made up nearly half of Ally’s first-quarter originations, and CFO Chris Halmy said there is no cap on how big Ally’s used-vehicle portfolio will grow.
“The increase in off-lease vehicles has gotten a lot of attention, but a 3-year-old vehicle hitting a dealer’s lot is a great financing opportunity for us,” he said. “The used book has performed extremely well. It’s a very predictable loss book, so we’re very comfortable in that space.”
Used-vehicle originations also help drive Ally’s growth channel, which consists of its non-Chrysler and non-General Motors originations, Halmy said.