Ally courts higher-credit consumers in ‘targeted' tighter auto financing

Though the bank is pursuing certain credit segments, tougher standards for borrowers will result in Ally Financial approving slightly less in auto financing than it had originally planned for 2023, the company said last week.

Ally said it now expected its retail auto loan and lease originations for the year would add up to the "lower end of [the] low $40 billion range." CEO Jeffrey Brown said on an earnings call Wednesday that the company would probably finance around $40 to $43 billion in auto transactions "as we trim risk on the edges."

If Ally saw increased consumer financial strength and slowing loan delinquencies, it might be open to approving more financing, Brown said.

"But right now, I think our house view is we trimmed $2, $3 billion of originations out of the outlook," he said.

Brown said in a statement Wednesday that Ally had opportunities in all its business lines, but it was "mindful of the current environment" and would protect against risk accordingly.

"Our focus remains on risk-adjusted returns, which may lead to slightly lower origination levels as we look to tighten underwriting in certain segments that don't meet return thresholds," he said.

Ally said it has loosened up its auto lending for what it defines as "S"-tier customers. Consumers falling in that proprietary demographic averaged credit scores above 740 last year and made up 30 percent of Ally's first-quarter 2023 auto lending, up from 24 percent a year earlier.

Ally has cut those customers' auto loan interest rates by 0.25 percentage points since December 2022, according to the bank. It told investors its strategy entering the second quarter involved a slight further reduction.

"To start April, the markets probably moved a hair more into the super-prime space," Brown said on the earnings call. "We're taking advantage of that."

Interim CFO Bradley Brown said Ally enacted most of its pricing actions near the end of the first quarter, and their effects should be more apparent in the second quarter.

"We see the impact of our recent pricing actions already taking shape," he said on the earnings call.

The top-tier borrowers have represented 40 percent of Ally's new loan originations in the past couple of weeks, he said.

But Jeffrey Brown said on the earnings call Ally's priority was the "intersection of prime and used," and a slide shown to investors said Ally sought to stay competitive in that space going into the second quarter.

Ally said it raised interest rates on "A"-tier borrowers, a group that held credit scores averaging above 680 last year, by 0.4 percentage points since December — less than the Federal Reserve has increased its benchmark rate during the same time. A-tier borrowers made up 46 percent of Ally's first-quarter originations, down from 51 percent a year earlier.

Ally said it is placing less of a priority on its third-largest auto borrower demographic, known as B-tier consumers, which made up 17 percent of first-quarter originations, down from 20 percent a year earlier. The group's credit scores stood in the 650 range in 2022.

The bank has hiked "B"-tier consumers interest rates 2.1 points since December, far more than the Fed has done with its federal funds rate.

On the whole, Ally has increased its interest rates 4.55 percentage points since the Federal Reserve began raising its benchmark interest rate, Jeffrey Brown said on the earnings call. The U.S. central bank has altogether hiked the federal funds rate 4.75 points in a series of actions starting in March 2022.

Ally said starting in February 2022, it has increased rates on S-tier customers 3.1 percentage points, bumped rates on A-tier consumers by 4.35 points and boosted rates on B-tier consumers by 7.1 points since January 2022.

"We've added significant price across the entirety of the credit spectrum, but our pricing action has been very targeted," Brown said.