The two sides of Ally Financial’s balance sheet told different stories — one positive, the other more worrisome — during the second quarter.
Ally’s flagship auto-lending business was buoyed by strong loan demand and improved credit quality. But deposit growth at the online-only bank slowed during the quarter, in part due to competition from other financial firms.
Overall, Detroit-based Ally reported $349 million in quarterly net income, up 38% from the same period a year earlier.
The improved results were driven largely by Ally’s auto finance business, which is benefiting from the surging U.S. economy. Retail auto charge-offs fell by 16 basis points to 1.04%, its lowest level in two years.
Consumer auto originations totaled $9.6 billion during the second quarter, up 12% from a year earlier. The net interest margin for retail auto loans was 6.08%, up from 5.80% during the second quarter of 2017.
“We do see a stronger consumer,” Ally CEO Jeffrey Brown said during a conference call Thursday, “fueled by strong employment conditions, higher take-home pay and wage inflation beginning to accelerate.”
Ally’s auto loan business may also be benefiting from rising interest rates and reduced competition. Wells Fargo, which has long been one of Ally’s top rivals, particularly in used-vehicle lending, has reduced its average auto loan balances by more than $10 billion over the last year.
The trends were less encouraging for Ally Bank’s retail deposit franchise, which has grown by 65% over the last five years. The $171.2 billion-asset Ally built its national online deposit base in large part by paying high yields, but that strategy paid diminishing returns during the second quarter.
Retail deposits totaled $81.7 billion, up 15% year over year but roughly flat in comparison with the first quarter, even though Ally’s average retail deposit rate climbed from 1.45% to 1.58%.
Mark Palmer, an analyst at BTIG Partners, noted that rising deposit costs may be a concern to some investors. “With that said, we believe management has made it clear that they expect to pay higher rates on its deposits as interest rates rise to maintain their edge,” he said in a research note.
Ally attributed the lack of growth in its retail deposit base to two factors — customers making tax payments during the second quarter, and customers moving funds from their savings accounts into higher-yielding investment accounts.
Ally is betting that its own wealth management offering —an outgrowth of the company’s 2016 acquisition of TradeKing Group — will reduce the outflow of customer funds to the likes of Vanguard and Fidelity.
“It’s just probably taking a little bit longer to get the business fully integrated, and now we just got to be more aggressive in how we’re targeting those customers, and even when we see outflows, how do we get the dollars back,” Brown said.
Ally Bank was launched back in 2009, when the competition for online deposits was far less stiff than it is today. The competition figures to intensify further as big banks such as JPMorgan Chase, Citigroup, Goldman Sachs, Citizens Financial, PNC Financial and Wells Fargo build out their own digital-only franchises.