Garnet Capital Advisors Blog

Ally Financial Inc. reported strong auto lending in the third quarter, and has predicted this success will continue, reducing the money it has set aside for loan losses even amid stiff competition and concerns that used car values will decline in the final quarter of the year.

Strong auto loan originations
The Detroit, Michigan-based bank holding company's auto loan originations reached $11.8 billion in the third quarter, a 23 percent surge from the same time last year. This increase happened as the firm generated $3.2 billion in originations for used vehicles, a record for this type of activity.

Commercial auto loan balances enjoyed a 12 percent year-over-year increase, hitting $31 billion. Growth channel dealers sharply increased their originations, which rose 54 percent from the same time in 2013.

As a result of all these developments, Ally Financial's auto-finance business generated $415 million in profits in the quarter, 22 percent more than the same period in 2013. Overall, the company's net income totaled $423 million during the third quarter, up from $323 million in the second quarter.

Michael Carpenter, Ally's CEO, said in a statement that the company made great strides in reducing its cost of funds, as well as increasing its net financing revenue and net interest margin. In addition, Ally succeeded in bolstering its core return on tangible common equity. Carpenter also weighed in on how various segments of the banks have improved.

"Operationally, Ally's businesses have performed well in the respective sectors," he stated. "The auto finance business continued to broaden its dealer network and new and used originations from growth channel dealers increased 54 percent year-over-year."

Optimistic credit forecasts
In addition to announcing these strong financial results for the third quarter, the firm reduced its provision expenses 28 percent from last year amid decreased expectations of credit losses.

"We still expect credit losses to increase from their current levels, but we don't expect them to increase as much as previous estimates," Christopher Halmy, chief financial officer of Ally Financial, stated during a conference call, according to American Banker. "So as we look out the next 12 months, we just don't expect a significant increase in the overall charge-offs."

While certain developments in auto lending could adversely impact the company, Ally Financial does have a few things going for it, the media outlet reported. While competition remains a concern, Carpenter told analysts on a recent conference call that this challenge is not getting any worse, and that it may have become less of a threat in the third quarter.

Attracting strong borrowers
The bank holding company might benefit from attracting the right clientele, as Halmy said on a conference call that Ally has drawn a larger amount of low-risk borrowers in the last few months, according to Reuters. As a result of this, only 9 percent of the firm's loan portfolio consists of subprime borrowers.

"Our book is skewing a little bit towards the higher credit quality, which will bring losses from a percentage basis really down," he told the news source. On top of having this strong position, the company has been proactively managing default risk by investing into its collections operation.

Furthermore, while Ally expects used car values to decline 6 percent between the third and fourth quarters, Sandler O'Neill analyst Christopher Donat emphasized that the bank holding company may have already compensated for this development by incorporating the falling values into the terms for its leases, according to the media outlet.

Many banks may be able to learn from the strong performance of Ally Financial. This company seems to be successfully navigating various headwinds, and firms with the right expertise can expect auto loan originations that are strong and profitable.