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Ally Posts Second Straight Profit on Autos, Mortgages

Ally Financial Inc., the lender formerly known as GMAC Inc., reported its second straight quarterly profit as automobile and mortgage units made money and pressure from bad loans eased.

Net income was $565 million in 2010’s second quarter, compared with a loss of $3.9 billion in the same period a year earlier, Ally said in a statement today. All of Ally’s operating segments were profitable, including a $230 million pretax gain from continuing operations in mortgages, Ally said. The company is 56 percent owned by the U.S. after benefitting from more than $17 billion of bailouts and doesn’t have publicly traded shares.

“The trends have been very positive on the auto finance side,” Kirk Ludtke, senior vice president for CRT Capital Group LLC in Stamford, Connecticut, said before the results were announced. “The auto portfolio held up nicely through the recession.”

Chief Executive Officer Michael Carpenter, 63, is refashioning Ally into a lender that serves more companies than just General Motors Co., its former parent. GM is planning to buy AmeriCredit Inc. to help finance car sales. Ally, which adopted its new name in May from its banking unit, has expanded its client list to include Saab Automobile AB and Thor Industries Inc., the biggest maker of recreational vehicles.

“Ally’s strategy is to evolve into being a more diversified bank and they are putting a lot of media effort into building their online bank,” said Kathleen Shanley, a senior bond analyst at independent debt-research firm Gimme Credit LLC in Chicago.

Ally’s Deposits

While expecting to remain profitable, Ally said some business conditions that contributed to this quarter’s earnings may slow in the months ahead. Ally cited gains from reselling used cars and mortgage loans and portfolio gains in its insurance investment account, according to slides prepared for an investor conference call. Used car prices are at a record high, Ally said.

Ally set aside $220 million as a provision for loan losses, an 80 percent decline from $1.11 billion.

Carpenter attracted deposits to Ally’s Internet bank by offering above-average interest rates and running advertisements that portray competing bankers as deceptive. The lender spent more than $95 million on ads last year, at least four times the amount spent by General Electric Co.’s finance unit, according to Nielsen Co., the media-research company. Deposits increased 7.2 percent to $34.3 billion from the first quarter.

ResCap Status

Ally is exploring the sale of its Residential Capital mortgage unit, which posted a profit for the quarter. The business and Ally’s bank together ranked as the fourth most- active housing lender in the first half, according to data compiled by Inside Mortgage Finance, a trade publication.

Ally originated $13.5 billion in home loans during the quarter, a 29 percent decline from a year earlier. Costs of repurchasing loans declined to $97 million from $237 million a year earlier; the expense was $49 million in the first quarter.

The firm may face more competition in auto lending after GM, which counts Ally as its primary lender, said last month it will buy subprime lender AmeriCredit for $3.5 billion, according to Thomas Ferguson, a debt analyst at KDP Investment Advisors in Montpelier, Vermont. GM is looking to boost sales to borrowers with blemished credit even as Ally has retreated from the space.

GM considered and rejected buying back Ally before turning to AmeriCredit, according to people familiar with the discussions. Ally said today that AmeriCredit focuses on a different part of the market for subprime customers, and that it remains the biggest provider of leasing to GM.

“Ally pulled away from subprime lending and leasing pretty dramatically over the past year or so,” Ferguson said in an interview. “The specter of reduced origination flow from GM to Ally becomes an issue, though it’s not that big, at least in the short term.”

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