Auto Lender Ally to Add Mortgages, Credit Cards to Loan Mix
Ally Financial will start offering mortgages and credit cards later this year — a signal that the company remains focused on its growth strategy in the face of a revolt by some shareholders.
The decision to expand into two new — and fiercely competitive — areas of consumer finance is part of an effort by Detroit-based Ally to combine the two pillars of its business. Currently, the company's fast-growing online bank has little customer overlap with its decades-old auto-lending franchise. Ally hopes that its upcoming forays into the mortgage and credit card businesses will allow it to sell more products to both its auto-loan borrowers and its online depositors.
But that strategy will take time to execute, and Ally's shareholders have been growing impatient with the firm's sagging stock price. Shares in Ally have fallen by about 36% since its initial public offering in April 2014, amid investor fears about a bubble in auto lending.
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Ally's inaugural investor day, held Thursday, was meant to assuage the concerns of shareholders. But investors seemed unimpressed, as shares in the company were down by nearly 6% late Thursday, outpacing a broader sell-off of banking stocks.
During the four-and-a-half-hour session, Chief Executive Jeffrey Brown suggested that Ally's poor stock performance has been driven by myths, false rumors and short sellers.
Referring to the current stock price, which is currently equal to 63% the book value of the company, he said, "It's unfathomable."
Ally had previously hinted that it was eyeing an expansion into mortgage and credit card lending. Its presentations at Investor Day were meant to convey that it is tiptoeing into the credit card business, and back into the mortgage market, in a low-risk way.
Ally repeatedly made distinctions between its new mortgage strategy and its failed efforts in the home-lending business a decade ago, when the company was known as GMAC. Large losses at GMAC Mortgage were a big reason the company had to be bailed out by the U.S. government in 2008 and 2009.
"This is very different from the GMAC Mortgage of the past," Brown said Thursday.
Starting late this year, Ally expects to originate mortgages directly to its existing customers.
Some of the loans will fit standards set by Fannie Mae and Freddie Mac, and will be sold to an unnamed financial partner. Ally will also originate higher-dollar jumbo mortgages, and plans to keep those on its balance sheet. Ally said that it will not service any of the loans.
"We're not doing anything crazy. We'll have very rigorous credit standards, strong controls in place," said Ally Bank CEO Diane Morais.
Ally Bank's credit card is expected to be unveiled in the second quarter. The company released few details about the product, though a presentation for investors described it as a cash-back card. Like Ally's new mortgages, the credit cards will be targeted initially at the company's existing customers.
Ally is wading into the credit card business in a way that limits its risks but also its earnings potential.
The new card will be cobranded with an unnamed company that will issue the product, according to Morais. Over time, Ally will have the option to move the credit card loans onto its own balance sheet, she said.
"The revenue projections are pretty modest for the first few years," Morais acknowledged.
Ally executives faced tough questions from analysts about its strategy in credit cards and mortgages, where the company will face off against experienced, sophisticated competitors.
Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, noted that other online banks have tried to enter the mortgage market and later retreated. Notably, Discover Financial Services decided to leave the home-loan business in 2015, just three years after jumping into it.
But Morais said that Ally's decision to enter the mortgage market is well-considered. She argued that some financial firms exited the mortgage business in recent years because of the large costs of updating systems in order to comply with new disclosure rules, which are now in effect.
Another analyst, Kenneth Bruce of Bank of America, questioned Ally's decision to outsource key parts of its two new business lines to other companies. He wondered whether that move will result in less-satisfied customers, since strong customer service has been a big factor in Ally Bank's success.
"Quite frankly, I feel like it's quite a big departure," Bruce said.
Morais responded that Ally gave careful consideration to customer service when it chose its partners in both the credit card business and the mortgage industry. She said that Ally wants to keep as much control as possible over the customer experience.
"And in both instances, we feel like we've been able to do that," she said.
Ally is scheduled to hold its annual meeting on May 3. Unless a compromise can be reached before then, the company faces a showdown with Lion Point Capital, a hedge fund shareholder that has proposed two candidates for election to Ally's board.
Lion Point is the public face of a group of shareholders pressuring management to outline plans for boosting its stock price and, eventually, returning more capital to shareholders.
In December, Lion Point asked Ally's board to set up a committee that would explore the firm's sale, but Ally rejected that idea.