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Ally Financial IPO Means More Risk as Treasury Cuts Stake

Ally Financial Inc. CEO Michael Carpenter
Michael Carpenter, chief executive officer of Ally Financial Inc., has refocused the company on its auto-lending roots since he took the helm in 2009. Photographer: Melissa Golden/Bloomberg

The U.S. Treasury Department has had Ally Financial Inc. in a regulatory headlock since its 2008 bailout. As the government sells shares in an initial public offering, Ally will soon breathe again -- and take on more risk.

Treasury’s exit will let Ally’s commercial bank make more auto loans to borrowers with lower credit scores, according to a prospectus issued last month. The Detroit-based lender run by Chief Executive Officer Michael Carpenter priced the shares today at $25 apiece, raising $2.38 billion.

Ally, the former auto-lending subsidiary of General Motors Co., is offering shares at less than one times tangible book value for this year, according to BTIG LLC’s projection. That’s less than half the comparable multiple of newly listed rival Santander Consumer USA Holdings Inc. and one-fourth that of auto-lender Credit Acceptance Corp.

“Once the IPO is completed and the U.S. government has been repaid, the company will have more wherewithal to grow Ally Bank and enhance its profitability,” said Mark Palmer, an analyst at BTIG in New York. “As Ally executes on its plans to reduce funding costs, the tangible-book-value multiple should expand as well.”

Tangible book value measures a company’s net worth after stripping out assets such as goodwill and brand names that tend to have little or no value in a liquidation.

Ally, whose biggest shareholders also include Third Point LLC, the hedge fund run by Daniel Loeb, counted 16,000 U.S. car dealerships as customers at year-end, the filing showed. Ally securitizes dealer loans for sale to institutional investors.

Ally Bank

The Ally Bank unit had 1.5 million accounts and $52.9 billion of deposits as of Dec. 31. It does direct banking over the Internet and by phone. The government currently requires that the company fund its subprime loans through Ally Financial instead of Ally Bank, increasing the amount of higher-cost unsecured debt.

“We believe that over time these requirements will normalize relative to other banks and have a favorable impact on our financial performance,” Ally said in the filing.

Subprime loans have grown to 11 percent of Ally’s portfolio, the company said in its prospectus. Increasing its share of subprime could be a credit risk, said Jesse Rosenthal, an analyst at CreditSights Inc.

Ally has been “reaching down the credit spectrum on underwriting,” Rosenthal said by phone from New York. “It’s really reflective of the strength of the auto asset class, but it’s still a risk.”

Government Rescue

Ally can exit the bailout by the end of the year and “hopefully before that,” Carpenter said on a Feb. 6 conference call. Adam Hodge, a Treasury spokesman, and Ally’s Gina Proia declined to comment on the IPO.

Ally, known as GMAC when it was the finance arm of GM, won Federal Reserve approval to become a bank holding company in December 2008. The change enabled it to tap the U.S. rescue, which swelled to $17.2 billion. Treasury said on March 27 that it has recouped $15.3 billion from Ally.

Ally has had a “long and extensive historical relationship” with GM, which accounted for 39 percent of its loans and leases last year, according to the prospectus. Ally’s ties to GM may pose risks as the automaker faces federal investigations into its recall of 2.6 million cars that were linked to at least a dozen deaths.

The government pared its holding to 17 percent from 37 percent by selling 95 million shares for $25. That puts Ally’s market value at about $12 billion, data compiled by Bloomberg show.

Deal’s Backers

Underwriters have the option to buy more than 14 million shares. Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc are handling the IPO, Ally said.

The bailout overhang won’t disappear completely after the offering. In its prospectus, Ally outlines its risks, many of which are tied to regulation.

Ally agreed to pay a record $98 million to settle U.S. Justice Department and regulatory claims that it helped car dealers inflate the cost of auto loans to black and Hispanic borrowers. The firm also remains subject to the Fed’s annual stress tests.

New Priority

Carpenter, 67, has refocused the company on its auto-lending roots since he took the helm in 2009. Ally lost 15 percent of total new loan share in the fourth quarter, making it the third-largest U.S. lender, according to Experian Plc, a research firm that analyzes auto finance. Wells Fargo & Co. was No. 1, followed by JPMorgan Chase & Co.

“Auto-finance dominates their business,” said Bert Ely, an independent banking consultant in Alexandria, Virginia, who said the company’s reliance on auto is one of its biggest short-term risks. “Ally doesn’t have the kind of diversification that big consumer-finance companies or big banks have.”

Ally’s competitor, Santander Consumer, remained profitable during the financial crisis and never needed a bailout. Last year, Dallas-based Santander became the preferred provider of auto loans for Chrysler Group LLC, replacing Ally.

The auto-lending unit of Banco Santander SA sold shares in a U.S. IPO in January, raising $2.1 billion. It’s valued around 2.5 times this year’s tangible book value, BTIG’s estimates show. The stock has declined 5.9 percent since the IPO.

“Ally Financial is starting from a much lower base whereas Santander Consumer was still profitable during the crisis,” BTIG’s Palmer said. “They’re different animals and becoming public companies from different jumping-off points.”

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