Ally Financial Inc. (ALLY), the second-largest remaining investment by the U.S. Treasury’s bailout fund, will repay the government by 2014 on the strength of its auto-finance business, its chief executive officer said.
Ally can make a significant payment this year toward the $14.6 billion still outstanding from the Treasury’s Troubled Asset Relief Program, CEO Michael Carpenter said in a Feb. 9 interview. Ally in 2012 financed the most new- and used-vehicle sales in the U.S. for the second consecutive year.
“We are 100 percent confident that we can repay the American taxpayer completely,” Carpenter, 65, said at the National Automobile Dealers Association’s convention in Orlando, Florida. “Whether that’s this year or next year, I don’t know. But it’s in that time frame.”
Ally is selling assets outside the U.S. to narrow the company’s focus to autos and its online retail bank while fending off claims tied to its Residential Capital unit, which went bankrupt because of losses on subprime home mortgages. Ally’s auto unit has expanded its used, leasing and subprime financing offerings ahead of expirations this year of agreements that guarantee business from General Motors Co. (GM) and Chrysler Group LLC.
GM Financial, the largest U.S. automaker’s credit arm, agreed in November to purchase Ally’s international auto-finance businesses in Europe, Latin America and China for $4.2 billion. In October, Ally agreed to sell its Canadian operations to Royal Bank of Canada, receiving $4.1 billion, and reached a deal to sell its Mexican insurance business to Ace Ltd. (ACE) for $865 million.
Once Detroit-based Ally completes those deals, U.S. auto financing will be “basically our only business,” Carpenter said Feb 9.
“Our customers don’t have to worry that we’ll wake up on Monday morning and decide we don’t think this is as attractive as we used to and back away,” he said.
Banks including Wells Fargo & Co. (WFC) have pursued auto financing after consumer debt within the industry performed better than most other categories during the financial crisis. U.S. sales of cars and light trucks climbed by at least 10 percent each of the last three years, according to researcher Autodata Corp.
Ally received $17.2 billion from the U.S. in a rescue that began more than four years ago. The lender, formerly known as GMAC Inc. and owned by GM until 2006, effectively became the captive finance units for GM and Chrysler, keeping credit flowing to new-vehicle buyers following the automakers’ bankruptcies, said Bill Muir, Ally’s president and head of its auto operations.
“For us, that was not a sustainable model,” Muir said in an interview at the NADA convention. “We were dependent on what the manufacturer wants.”
Used-vehicle financing and leasing were 46 percent of Ally’s originations last year, up from 14 percent in 2009. Subsidized-rate loans, made to consumers at below-market rates for the automaker’s marketing campaigns, have dropped to 20 percent of originations from 58 percent during that span. With so-called subvented loans, the automaker compensates the lender for the difference for the below-market rates.
“We now have morphed to our business reflecting what’s important to the dealer,” Muir said. “We’ve trended toward a much more balanced group of business, which by the way has better margins.”
Ally’s agreement with Auburn Hills, Michigan-based Chrysler that guarantees a minimum percentage of its vehicles sold with subvented loans, expires at the end of April.
Chrysler, majority owned by Fiat SpA (F), last week reached an agreement with Banco Santander SA (SAN), Spain’s biggest bank, to replace its deal with Ally. Santander Consumer USA Inc. will form Chrysler Capital, which begins operations May 1. GM’s agreement with Ally ends at the end of this year.
Santander’s arrangement with Chrysler has negative implications for Ally’s credit because it will erode Ally’s share of financing to Chrysler car buyers and dealers, Moody’s Investors Service said today in a report. Moody’s cited an immediate loss of subvented loans from Chrysler, a “small fraction” of Ally’s originations.
“We’re still happy to do subvented buying, but it’s not our reason for existence anymore,” Ally’s Muir said Feb. 9.
The “more meaningful” threat to Chrysler’s deal with Ally is any potential erosion in Ally’s dealer finance business, Mark Wasden, a New York-based analyst for Moody’s, wrote in today’s report. Ally financed 58 percent of Chrysler dealer inventory through Sept. 30 last year, he wrote.
“For Ally, strong penetration of dealer relationships is central to its overall business proposition and differentiates it from other auto lenders,” Wasden wrote.
The U.S. Treasury and the watchdog for its bailout program sparred last month over whether the department has an adequate exit plan for Ally. Christy Romero, the special inspector general for the TARP, wrote in a report that while Treasury has listed several options for divesting its Ally investment, including a public or private sale of stock, Treasury hadn’t decided which of these exit paths to take.
Timothy Massad, the Treasury’s assistant secretary for financial stability, said in a letter to the inspector general released last month that the exit plan involves the reorganization of ResCap, Ally’s mortgage unit, and the sale of the company’s international operations.
“We can make a significant repayment to Treasury this year, for sure,” Carpenter said. “Whether we can get them all the way out this year, probably not is the real answer.”
Ally is the second largest remaining TARP investment behind GM, which hadn’t repaid $21.6 billion as of the end of last year, according to the special inspector general for the TARP.
“We don’t want them as our shareholder, and they don’t want to have the investment,” Carpenter said of the Treasury Department’s 74 percent stake in Ally.
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