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Ally Financial Moving More Downstream Into Higher Risk Tiers

August 2, 2016

DETROIT — During Ally Financial's second quarter earnings call, company officials said the finance source is moving more downstream into the higher risk, higher yield credit tiers and focusing less on the low-risk superprime loans. 

“One of the main strategies that we’ve really laid out this year for the auto business is really trying to optimize the ROE of that business,” said Christopher A. Halmy, CFO. “We’re looking at a lot of the super prime loans, where we don’t see the real profitability and [are] looking to sell those loans." 

Looking at the finance source’s second quarter results, that strategy appears to already be in motion. The company originated 2% less super prime (740+), 3% more prime (660-739), 2% more nearprime (620-659), and 4% nonprime (0-619) loans than the same period last year.

While the company is confident in its strategic shift, Halmy acknowledged that its shift toward higher risk loans will also have some negative affects, like higher net chargeoffs and delinquencies.

“Our assets yields have continued to rise as we prioritize origination auto loans that offer higher risk-adjusted returns and profitability. Year-to-date, we have put on retail loans at over 5.8% average yield, which is starting to really drive up the overall retail portfolio yield,” Halmy said. “Total charge-offs for the quarter were 94 basis points. As we've been saying for some time, you should continue to expect modest year-over-year increases, given the mix optimization that has been underway for a while now.”

Halmy reported that the Ally's net charge-off rate of 0.94% represented a 0.29% increase from the year-ago period. Delinquencies in the second quarter registered at 2.60%, up 0.31% from a year ago. Total delinquent contracts now total $1.6 billion, 18.2% higher than the same time last year.

In the second quarter, record application volume drove originations to $9.4 billion, a 4.4% quarter-over-quarter increase but a 20% decrease from the year-ago period. However, the company’s quarterly originations have been noticeably lower since the fourth quarter of 2015, around the time when General Motors diverted its U.S. Buick, Cadillac and GMC subvented leases away from Ally.

This quarter, Ally saw a higher percentage of its originations coming from its growth channel — what the finance source calls everything that isn’t Chrysler and GM. Originations coming from its growth channel grew 5% from the second quarter of 2015. The finance source also saw a shift away from new retail standard and subvented sales in favor of more used auto sales, which now account for 43% of the finance source's mix. It is this foothold in the used market, the company stated, that will give it a leg up in the event of a retraction in SAR. 

“We're also protected against any theoretical retraction in SAR, given over 40% of what we originate is pre-owned vehicle paper, which is a much larger market and arguably even more predictable collateral. So in that spirit, the Auto Finance franchise continued its focus on driving price in the marketplace and capturing high-quality returns relative to our risk appetite,” said CEO Jeffrey Brown.

Ally also made headway in the amount of vehicle service contracts (VSC) coming from its non-Chrysler/GM dealers. During the second quarter, VSC volume from non-Chrysler/GM dealers grew 34% compared to the prior quarter.

However, the gains the finance source realized from its VSC business were overshadowed by the insurance losses it suffered due to severe spring hailstorms in Texas and Oklahoma. The storms in those regions pushed insurance losses to $96 million — 43% more than the same time last year.

“Our Insurance business incurred about $30 million of higher weather losses over the prior year due to severe spring hailstorms in Texas and Oklahoma. Specifically, one catastrophic event in early April is the fifth largest weather event in Ally history. These weather losses trimmed [earnings per share] by about $0.04 per share. If you exclude these outsized weather losses, our adjusted EPS was up 25% year over year, which is pretty remarkable,” Halmy said.

Ally’s auto finance segment brought in $426 million in pre-tax income, a 14% year-over-year gain. Net lease revenue was $267 million, $30 million less compared to the same time last year. Ally Financial, as a whole, reported $360 million in net income.

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