As some big banks have grown warier of auto lending, Ally Financial is starting to reap benefits.

The Detroit-based firm reported Thursday that yields in its retail car lending business rose by 6% in the second quarter from the same period last year. The improved margins helped drive 9% revenue growth.

Net income fell by 30% to $252 million, but that was largely due to a favorable tax item during the second quarter of 2016. Earnings per share were 55 cents, 3 cents better than the consensus of analyst estimates compiled by FactSet Research Systems.

Ally, once an arm of General Motors, has been seeking to diversify its business by building its online deposit franchise, launching a new credit card and buying an investment website in recent years. Still, the $162 billion-asset firm remains heavily dependent on auto lending, which enjoyed strong growth after the financial crisis, but has more recently shown signs of overheating.

Jeffrey Brown, chief executive of Ally Financial.
“In auto finance, we remain cautious but constructive,” said Ally CEO Jeffrey Brown. “Used vehicle price declines and loss performance were well within our expectations, and we’re seeing improved profitability in both our consumer and commercial auto loan portfolios.”

Earlier this month, Wells Fargo said that its auto loan originations fell by 45% during the second quarter. At Citizens Financial in Providence, R.I., auto loans represented 10% of interest-earning assets, down a percentage point from a year earlier.

At Ally, retail auto loan originations fell by 9% during the quarter to $8.6 billion, though a larger share of those loans were for used cars, which tend to produce higher yields. Commercial auto loan originations rose by 11% to $38.6 billion.

“In auto finance, we remain cautious but constructive,” CEO Jeffrey Brown said in a press release. “Used vehicle price declines and loss performance were well within our expectations, and we’re seeing improved profitability in both our consumer and commercial auto loan portfolios.”

During a conference call with analysts, Brown noted that some of the firm’s competitors have been pulling back, which he said has allowed Ally to earn higher yields while also taking less risk.

Ally charged off $199 million in retail auto loans during the second quarter, up 34% from the same period a year earlier. But Chief Financial Officer Christopher Halmy said that risk-adjusted yields have improved.

Ally Bank, one of the nation’s leading online banking franchises, reported deposits of $86.1 billion, up 18% from the year-earlier period. The average deposit yield was 1.18%, 4 basis points higher than in the second quarter of 2016.

Halmy said that he expects Ally Bank’s deposit rates to rise in the third quarter, with recent interest rate hikes by the Federal Reserve having a lagging impact.

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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.