Intense competition for auto loans has led to a deterioration of credit standards, so it was a bit surprising that Ally Financial reduced its loss reserves in the second quarter.

Ally, one of the nation's top auto lenders, lowered its allowance for loan losses to $1.17 billion, or $21 million less than in the first quarter.

The decision, which came amid mixed signals about the credit quality of Ally's auto loan portfolio, prompted questions during an earnings conference call with analysts. The company reported its second-quarter results early Tuesday.

"Listen, we think our reserve is very adequate today," responded Ally Chief Financial Officer Christopher Halmy. "We do expect chargeoffs to continue to kind of creep up on a year-over-year basis, but we think that will be somewhat predictable and measurable."

Ally attributed the decision to lower its loss provision partly to seasonal patterns in the chargeoff rates for retail auto loans. Chargeoffs on those loans were down in the second quarter, while delinquencies were up.

"I don't feel like we've seen any material signs of deterioration," said Christopher Donat, an analyst at Sandler O'Neill, referring to the credit quality of Ally's auto loan portfolio.

Ally said that it expects its loss provision to rise again in the third quarter.

Executives at the company, which remains partly owned by the U.S. government following its crisis-era bailout, also provided assurances that they have a good handle on the risks involved in auto lending today.

"There's been a lot of noise out there about the loosening of lending standards, given the current competitive environment," Halmy said. "We really haven't shifted our risk appetite over the past two years."

"Overall, we remain very focused on asset quality, and we have robust risk-based pricing models and monitoring in place to make sure we're getting compensated for the risks that we take. And these models are built to run through all credit cycles."

A recent New York Times article raised red flags about the sizzling subprime auto market, highlighting specific borrowers whose loan applications listed inflated incomes. But on Tuesday, Ally Chief Executive Officer Michael Carpenter suggested that article's portrayal of the market is off base.

"I would say in very simple terms, that article does not describe the nature of the business that we are in, and does not describe the way that we run our business," he told analysts.

Ally reported net income of $323 million in the second quarter, a turnaround from the same period a year earlier, when the company lost $927 million. Consumer auto loan originations last quarter totaled $10.9 billion, which was the second highest mark in the company's history, while used car loan originations at Ally reached their highest level ever.

Ally's shares were down 1.1% in midday trading Tuesday, to $23.75.

Moshe Orenbuch, an analyst at Credit Suisse, said losses in auto lending have been restrained by the fact that used cars are not losing their value as quickly as they have in the past.

But industry observers expect used-car prices to drop more rapidly over the next 18 months, as the supply of inventory on lots swells from the arrival of many cars that were previously leased. Lower used car prices mean bigger losses for lenders when their loans go bad.

Halmy told analysts Tuesday that the company expects prices for used cars to go down. "So it's built into our expectations," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.