Steep drop in used-car prices hit Ally Financial in 1Q

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Falling used-car prices took a bite out of Ally Financial’s profits in the first quarter, as the company collected substantially less revenue from the sale of previously leased automobiles.

The Detroit-based auto lender reported net income of $214 million, which was down 17% from the same period a year earlier. Shares in the company were down 3.4% in midday trading Thursday.

One key reason for the disappointing performance was a sharp decline in net lease revenue. Results in the leasing business are heavily affected by used-car prices, and Ally said that during the first quarter, prices of previously owned vehicles fell 6.7% in comparison with the same period a year earlier.

The company reported that it lost $45 for each leased automobile that it sold in the first quarter, which was down from a profit of $700 per vehicle a year earlier. During a conference call Thursday, Ally CEO Jeffrey Brown said that the firm is reducing its reliance on the leasing business.
Ally was also hurt in the first quarter by Mother Nature. Hailstorms in late March led to higher than usual losses on the firm’s insurance products, which auto dealers buy to protect against the risk of damage to their inventory.

Brown said Thursday that Ally has reached a new reinsurance agreement to protect itself against weather-related insurance losses in the future.

Ally is also battling unfavorable trends in its flagship auto-lending business. Many banks have been reducing their exposure to the car-loan market amid concerns about weakening credit performance.

Ally did not pull back as much as some of its big-bank peers in the first quarter; the company originated $8.9 billion in auto loans, which was down just 1% from the same period last year.

Meanwhile, the company charged off $251 million in retail auto loans, up from $173 million in the first quarter of 2016. Ally’s provision for loan losses was $271 million, an increase of 23% from the same period a year earlier.

On the flip side, yields from the company’s retail auto lending business rose to 5.66%, up from 5.31% a year earlier.

Brown expressed belief that the $162 billion-asset company can achieve higher risk-adjusted yields in the auto lending business as competitors reduce their exposure. But he also noted that Ally has been decreasing its own exposure to subprime auto loans, where much of the concern is focused.

“Bottom line is we’re eyes wide open with respect to the backdrop for auto lending,” Brown said.

One bright spot in Ally’s first quarter was deposit growth at its online-only bank. Retail deposits at Ally Bank surged to $70 billion, up 19% from the year-earlier period.

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