Ally's EV lease strategy includes tax credits, residual guarantee

Ally Financial rapidly expanded its electric vehicle leasing business after receiving a 50 percent residual value guarantee from an unspecified automaker during the first quarter.

Ally, one of the nation's largest auto lenders, said July 17 it financed $1 billion worth of fresh EV and plug-in hybrid loans and leases during the second quarter — more than double the $347 million seen a year earlier and up 39 percent from the first quarter.

Leases, not loans, have been propelling EV and PHEV growth. Ally said it wrote $639 million worth of EV and PHEV leases during the second quarter, more than tripling the $174 million a year earlier. EV and PHEV loans more than doubled from $173 million to $366 million during that time, according to a second-quarter investor presentation.

EVs represented 83 percent of Ally's second-quarter $639 million leasing volume. A year earlier, they were not in the portfolio; Ally leased only plug-in hybrids.

"This increase in volume is another example of how our auto business is well-positioned for an evolving auto landscape," Ally CFO Russ Hutchinson said during the earnings call July 17. "We're pleased with the risk-adjusted returns we're getting in the channel, particularly with the residual value protection."

Hutchinson said Ally reached a residual value guarantee with an automaker in March. Ally would not provide the name of the automaker to Automotive News.

"Virtually all of our battery electric vehicle lease contracts come with residual guarantees from the OEM," Hutchinson said on the earnings call.

Ally said in a first-quarter government filing the company entered into the deal with the automaker during the period and indicated that manufacturer was guaranteeing 50 percent of the vehicle's contract residual value. The filing also did not specify automaker name or powertrain type.

An earlier agreement with an automaker — it was unclear if it was the same company or involved EVs as well— was guaranteeing Ally 15 percent of sticker price.

The previous deal didn't generate the same kind of leasing volume seen under the new arrangement.

Ally had $43 million worth of leased vehicles carrying the 15 percent-of-sticker guarantee during the first quarter of 2023, $30 million with that protection during the second quarter that year and $12 million at the end of 2023.

In the first quarter of 2024, Ally had $272 million worth of leased vehicles carrying one of the two guarantees — nearly six times as much as a year earlier — and all but $8 million of it was related to the 50 percent-of-residual pledge.

In the second quarter, Ally nearly tripled that amount to a portfolio of $776 million worth of leased vehicles carrying either guarantee —with all but $3 million guaranteed for 50 percent of residual value.

Lease contracts divide the vehicle's cost and lender profit margin into a series of monthly payments and a lump sum residual value. At the end of the lease (three-year terms are common), the consumer can buy the vehicle for the residual value or give it back to the lender, who then has a used vehicle on its books.

Ideally, the lender could sell the vehicle and recoup the entire residual value — or an even higher amount as happened during the inventory shortage — and break even or turn a profit. But if the residual value is too high, the lender might lose money on the deal.

This excess residual value might be intentional — an automaker, for example, might have inflated residual values to give the lessee lower monthly payments — or unintentional, a failure to predict the used-vehicle market at lease end. Recently, aggressive sticker price cuts by automakers have caused used-EV prices to collapse — potentially a problem for any lender who was crafting leases based on the old EV values.

Residual value guarantees provide some peace of mind by putting a floor on potential losses. Hutchinson said during the earnings call Ally's EV guarantees gave it "significant protection against declines in value."

Increasing from $12 million in guaranteed leases to $776 million in two quarters suggests Ally bought and leased thousands of EVs from the unnamed manufacturer during the first half of the year.

Among the automakers that Kelley Blue Book data indicated for the first half of 2024 had high EV sales or models with lower EV volume but higher sticker prices were Ford, General Motors, BMW, Mercedes, Toyota, Kia, Nissan and Lucid — all of which said they had no program like that with Ally. Volkswagen, Audi, Volvo and Polestar have not responded to email inquiries left in mid-August. 

A Hyundai spokesperson reported no corporate knowledge of an Ally collaboration with Hyundai or Genesis. Rivian's latest quarterly government filing describes it offering a guarantee only for an unspecified number of leased vehicles to Chase Auto, which is its white-label captive finance partner.

Tesla, the EV market leader, did not respond to an email inquiry in mid-August. But it appears to have significantly increased its residual guarantees during the first half of the year.

In a second-quarter government filing, Tesla reported a maximum exposure of $807 million in residual value guarantees to "commercial banking partners" at the end of June — up from $166 million at the end of 2023. It said its obligation applied if the lenders are "unable to sell the vehicle at or above the vehicle's contractual residual value at the end of the lease term." But it called the liability for these guarantees "immaterial" at both the quarter and year's end.

According to Ally, the bank makes the same profit off EV leases as it does with internal combustion engine leases because of the $7,500 tax credit available to those buying EVs for commercial use. The bank knocks $7,500 off consumer lease payments, which makes EVs cheaper to lease than gasoline-powered models, but it also collects a $7,500 tax break, which lowers its own taxes, according to the investor presentation.

Ally explained the concept with a hypothetical 36-month EV lease written while the bank experienced a 21 percent tax rate. Under this scenario, Ally subsidizes the lease by $2,500 each year of the roughly three-year lease, but it collects a $6,500 tax benefit in the first year and then a $500 tax break in Year 2 and again in Year 3 and comes out even.

Hutchinson said Ally's EV leasing revenue is less than revenue from ICE leasing, but it's not a material amount.

"Strong EV lease originations drove more than $90 million in EV tax credits within the period, resulting in a negative tax rate for the [second] quarter," Hutchinson told the earnings call. "We expect the momentum we've seen in EV leasing to result in a negative tax rate for the year."