Ally Questions Automakers' Discipline as Cars Pack Dealer Lots

  • Detroit lender sees more used-car price declines through 2019
  • Bank is tightening auto credit as competitors exit loan market

Ally Financial Inc. Chief Executive Officer Jeff Brown said he’s more concerned about bulging car-dealer lots than overdue auto loans.

“Inventory lots across the U.S. are very full,” Brown said Thursday in a phone interview after the lender reported first-quarter profit that matched estimates. “We’re watching how disciplined manufacturers are.”

Ally, which Bloomberg Intelligence estimates has 55 percent of its loan book in auto credit, is keeping its “eyes wide open” as U.S. auto sales slump and used-car prices drop, Brown told analysts on an earnings call Thursday. Ally scaled back 2017 earnings expectations last month amid a sharp decline in used-vehicle prices, which Brown expects to decline 6 to 7 percent this year, then another 6 to 7 percent the following two years.

While Brown said Ally is still “constructive” on auto lending, the used-car price projections are at the mercy of automakers heavily discounting new models to sustain sales. Incentive spending and an oversupply of used vehicles coming off leases are depressing used-car values. The National Automobile Dealers Association’s used vehicle price index plunged in March to the lowest since September 2010, fueling concerns about the fallout for automakers, lenders and car-rental companies.

Declining used-auto values can be problematic for lenders -- they have to boost provisions against future losses when collateral on loans become less valuable. Falling vehicle prices also reduce the amounts finance companies can recover on repossessed cars.

Staying In

Brown said Ally is tightening credit but hanging in more so than some competitors. Fifth Third Bancorp said this week it is planning to shrink its auto loan portfolio by $2.5 billion, or 26 percent, by 2019.

First-quarter financial data show Ally has been cutting back on subprime loans. The percentage of Ally’s auto originations to U.S. consumers without a FICO score or with a grade of 619 or less fell to 15.7 percent in the first quarter, down from 17.8 percent a year earlier.

Subprime borrowers are generally considered to be those with FICO scores below 620.

“We recognize sales have been pretty strong, credit has been pretty stable and all that’s transitioning right now,” Brown said in the interview. “We’re cutting some of the tails or the under-performing pockets of our book.”

Ally, formerly the financing arm of General Motors, was bailed out by the U.S. Treasury Department during the financial crisis. The Detroit-based bank said first-quarter net income dropped 14 percent to $214 million from a year earlier. Adjusted earnings were 48 cents a share, in line with the average estimate of analysts surveyed by Bloomberg.

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