Ally Financial seized an opportunity in its auto-lending business during the first quarter, but it also contended with the challenge of running an online-only bank at a time when some depositors are chasing higher yields.

The Detroit company on Thursday reported net income attributable to common shareholders of $250 million, up 14% from the first quarter of 2017.

Ally attributed the gains in part to a record $4.8 billion of originations on used-car loans during the quarter, up 14% from the same three-month period last year.

But profits were also dragged down somewhat by rising deposit costs.
Though retail deposits climbed 17% from the same period last year to $81.7 billion, the average rate it paid on those deposits increased 36 basis points to 1.45%.

Mark Palmer, an analyst at BTIG Partners, said in a research note that online-only banks may seem less compelling to consumers in a rising-rate environment. But he added that in order to maintain an edge as U.S. interest rates rise, Ally’s management team has been expecting to pay higher rates on deposits.

Ally’s shares were trading at $27.17 late Thursday, down 2.7% from Wednesday’s close.

There was brighter news for investors in Ally’s flagship auto-lending business.

Total originations increased 6.7% year over year, to $9.5 billion, and used-vehicle lending accounted for substantially all of the growth.

Once the auto-financing arm of General Motors, the $170 billion-asset Ally said it can no longer rely as heavily on loans to purchasers of new GM vehicles to drive profits.

“We’ve deliberately focused on growing our used originations,” Ally CEO Jeffrey Brown said Thursday during a conference call with analysts. “We like the characteristics of the paper. It tends to be more predictable performance, better yielding. It’s sourced from a diversified base of dealers, and the market is much larger in size than new.”

Four years ago, used-vehicle lending made up only 30% of the company’s retail auto originations. By the first quarter of this year, that number had risen to an all-time high of 50%.

Ally is leaning harder on used-vehicle loans at a time when Wells Fargo, long the nation’s largest used-car lender, has been shrinking its auto-lending business.

This push into used-car lending is partially a response to reduced competition, Chief Financial Officer Jennifer LaClair said during the conference call. “I think it is a place where we feel the competition is fair,” she said.

Consumers who take out loans on used cars tend to default more frequently than those who finance purchases of new cars, LaClair acknowledged. But she added that the size of the loss absorbed by lender when used-car loans go bad tends to be smaller than on new-car loans.

“I think it’s just an easier asset class to predict collateral values,” she said.

For the first quarter, Ally reported a retail auto net charge-off rate of 1.47%, down from 1.54% in the same period a year earlier. The percentage of retail auto contracts that were at least 30 days past due rose to 2.61%, up from 2.36% in the first quarter of 2017.

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.