Ally Financial is reaping the benefits of decisions by other U.S. banks to scale back their auto lending.
Facing less competition than it has in recent years, the Detroit company is growing its car loan portfolio at a fast clip and earning fatter margins on its loans.
During the last three months of 2017, the $167 billion-asset company originated $9.1 billion in consumer car loans and leases, up 11% from a year earlier. The estimated yield on Ally’s retail auto loan originations climbed to 6.24%, up from 5.82% in the same period in 2016.
Just a few years ago, Ally and Wells Fargo were neck and neck as the nation’s two largest auto lenders. But at San Francisco-based Wells, originations in the segment totaled just $4.3 billion during the fourth quarter, a 33% decline from the same period in the previous year.
As a result, Ally has been able to select from a larger pool of credit-seeking consumers, and to charge higher prices for the loans that it chooses to make, according to analysts at BTIG.
“We believe Ally’s performance likely was aided by the retreat of large banks such as Wells Fargo,” they wrote in a research note Tuesday.
Rising losses have been a factor in some lenders’ decisions to retreat from the auto market. The higher chargeoffs have been driven in part by falling used-car prices, which have reduced the amount of money that lenders recover when they repossess vehicles following a default. Concerns have been most acute in the subprime part of the market, due to loosening loan standards in recent years.
But Ally Chief Financial Officer Christopher Halmy said Tuesday that he expects the company’s retail auto chargeoff rate to remain in last year’s range. The forecast was boosted by what Halmy described as subsiding competition in subprime auto lending.
“I think that has something to do with just the overall competitive environment, and really some people getting stung by the 2015 vintage,” he said.
Ally’s retail auto net chargeoff rate climbed to 1.74% in the fourth quarter, up from 1.56% a year earlier. The provision for loan losses in the company’s auto finance segment climbed by 5% to $288 million.
Halmy noted that high levels of employment are helping borrowers to stay current on their car loan payments, and he noted that many financially strapped U.S. consumers will see larger paychecks as a result of the recently passed tax legislation.
“So we’re constructive on credit, and we’re constructive overall in the subprime market,” Halmy said.
While Ally has been helped by reduced competition in its flagship auto lending business, the firm is being forced to pay more to depositors. Deposit rates at the company’s online bank were up in the fourth quarter by 20 basis points from the same period a year earlier, as Ally and its competitors responded to interest rate hikes by the Federal Reserve.
“I think we’re seeing the biggest competitive pressure on the deposit side,” Halmy said.
Ally announced Tuesday that it expects its effective tax rate to fall to around 23% to 24% as a result of the law passed in December. That would be down from 38.6% last year and 29.7% in 2016.
The company plans to use some of the tax savings to pay a $1,000 bonus to its employees, and to increase its charitable contributions by around $6 million. But the vast majority of the tax benefits are expected to flow to the company’s bottom line, enabling Ally to distribute more money to its shareholders.
In the fourth quarter, Ally reported net income of $181 million, or 41 cents per share, which pleased investors. Shares in the company were up 3% in midday trading Tuesday, even amid a broad decline in the U.S. stock market.