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Ally’s Profit More Than Triples on Sale of Canadian Assets

May 1 (Bloomberg) -- Ally Financial Inc., the auto lender majority-owned by U.S. taxpayers, said first-quarter profit more than tripled, aided by gains from selling assets.

Net income was $1.1 billion, compared with $310 million a year earlier, the Detroit-based company said today in a statement. The U.S. owns 74 percent of closely held Ally, which doesn’t report earnings per share.

Chief Executive Officer Michael Carpenter is selling assets and narrowing the firm’s focus to U.S. auto lending and retail banking. His goal is to repay the $17.2 billion taxpayer bailout that gave the government a controlling stake. Carpenter may pursue an initial public offering if he can protect Ally from legal claims tied to its Residential Capital unit, which went bankrupt because of losses on subprime home loans.

The asset sales and Ally’s exit from mortgage lending and servicing “are key steps in our path toward further strengthening the company, maximizing shareholder value and returning the remaining investment to the U.S. taxpayer,” Carpenter, 66, said in the statement.

Results were skewed by Canadian divestments that added $900 million and writedowns tied to sales of mortgage servicing rights that cost $198 million. Ally said its core pretax loss was $6 million, compared with core pretax income of $111 million a year earlier.

Auto Lending

Income from auto lending rose 42 percent to $343 million, while the firm posted a $6 million loss from mortgage operations, compared to a $63 million profit in the year-earlier quarter.

Cars and light trucks sold at an average 15.2 million annualized rate in the U.S. during the first quarter, compared with 15.3 million in the fourth quarter, according to Ward’s Automotive Group data. Before then, the last time the annual pace had exceeded 15 million was the fourth quarter of 2007.

Ally completed the sale last month of contracts for the right to handle billing and collections on $115 billion in outstanding mortgages. The deals for so-called servicing rights with Ocwen Financial Corp. and Quicken Loans Inc. generated about $850 million in proceeds. Another $2.6 billion came from selling most of Ally’s operations in Europe and Latin America to General Motors Co., the largest U.S. automaker.

Ally, formerly known as GMAC Inc., was owned by GM until 2006, when the automaker sold 51 percent to Cerberus Capital Management LP. GMAC almost collapsed under the weight of bad subprime mortgages during the financial crisis. The U.S. took its stake in return for a package of financial aid designed to keep credit flowing to the auto industry and preserve jobs.

Repayment Plan

Carpenter’s plan for repaying the U.S. has included an IPO, which was put on hold until ResCap’s bankruptcy is closer to resolution. The CEO has said Ally would be willing to contribute $750 million to ResCap to insulate the parent company from legal claims tied to faulty mortgages.

“I will politely call it a hostage payment,” Carpenter said on today’s conference call. If creditors don’t accept the payment, “we are prepared to go in the direction of litigation and in the event that we go in that direction we believe we’ll be fully and completely vindicated.”

ResCap debt holders asked U.S. Bankruptcy Judge Martin Glenn in Manhattan last month for permission to sue Ally, saying it may be responsible for $25 billion of ResCap’s debt. Carpenter said Ally isn’t on the hook for claims against ResCap.

Corporate Veil

“The only basis on which the creditors could assert such a claim would be piercing of the corporate veil,” Carpenter said, referring to efforts that would link Ally to ResCap’s liabilities. “We think the chance of that in court over time is zero.”

ResCap’s $2.12 billion of 9.625 percent notes due May 2015 rose 1 cent to 110 cents on the dollar at 11:35 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. Ally’s $2 billion of 8 percent bonds maturing in November 2031 climbed 1.25 cents to 133 cents on the dollar.

Ally also has sparred with the Federal Reserve, which rejected the lender’s capital plan after finding that the firm’s planning process and capital ratios didn’t meet standards. The lender said the central bank’s analysis was “fundamentally flawed.”

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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