By Andrew R. Johnson
Ally Financial Inc. is determined to diversify its auto-lending partners as it faces the potential loss of loan volume from Chrysler Group LLC, Ally executives said Thursday.
They downplayed the potential effect of the auto maker's decision to terminate a key financing contract next year, stressing that Ally's overall relationship with Chrysler dealers should remain intact.
"We fully planned for this," Jeff Brown, senior executive vice president of finance and corporate planning for Ally, said during a first-quarter-earnings conference call. "This was not a surprise to us. Our financial plans for this year had assumed a decrease in this level and we're not bothered by it."
Chrysler said Wednesday it told Ally it would not renew the contract after it expires April 30, 2013. The auto maker was required to give notice by the end of this month if it didn't plan to continue the deal, which would have automatically renewed for another year.
The move comes as Ally, which remains majority-owned by the U.S. government, is battling against big banks, including J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co.), Wells Fargo & Co. (WFC) and U.S. Bancorp (>> U.S. Bancorp), that are bulking up in the auto-lending business as growth prospects in other asset categories are muted. Ally's contract with its other major customer, General Motors Co. (>> General Motors Company), also faces challenges as GM adds additional lenders to the fray.
Ally executives stressed the Chrysler contract pertained to its ability to offer "subvented" loans, or those that carry promotional rates to lure customers, and not financing used to fund dealer inventory, real estate and consumer loans offered under standard rates. The lender has been working to diversify by striking partnerships with other manufacturers and focusing more on used-car lending, which rose 15% from a year earlier.
Subvented loans through GM accounted for 17.5% of Ally's total U.S. originations, down from 21.7% in the fourth quarter. Chrysler subvented loans were 5.2% of Ally's U.S. originations in the first quarter, down from 5.4% in the fourth quarter.
Subvented loans are "by far the lowest-margin business that we do," Michael Carpenter, chief executive of Ally, said during the call.
"That loss of subvented share is much less important to us than the loss of overall share," Carpenter said.
Chuck Eddy, who runs a Chrysler dealership in Youngstown, Ohio, said he uses Ally for most of his financing needs, including inventory and real estate financing and standard-rate consumer loans. If Chrysler decides to entirely replace Ally or add other lenders for subvented consumer loans, he doesn't expect it to affect the rest of his relationship with Ally.
"If they can't touch the subvention, then they can't touch the subvention," said Eddy, a member of Chrysler's National Dealer Council. "Ally is still going to be my lender of choice" for the rest of his financing needs.
Chrysler has been exploring other options for providing financing to dealers and its customers, including setting up a lending joint venture with several lenders, The Wall Street Journal has reported. Ally could play a part in that.
"It is indicative of our willingness to open up a dialogue with ... different financial institutions," Chrysler Chief Executive Sergio Marchionne said during an earnings conference call Thursday. "We have an opportunity to establish a different model."
Toronto-Dominion Bank (TD, TD.T) bought Chrysler Financial, the auto maker's former finance arm, from private-equity firm Cerberus Capital Management LP last year.
GM, which still holds a minority stake in Ally, has also gotten back in the captive-finance business. It acquired subprime lender AmeriCredit Corp. in 2010 and has been bulking up its business.
GM has a contract with Ally for subvented loans that expires Dec. 31, 2013. Most recently it struck a deal with Wells Fargo to provide dealer and consumer financing, including subvented loans, in GM's U.S. Western region.
Ally has made headway in diversifying, particularly in the used-car lending market, said Mohak Rao, director of financial institutions for Fitch Ratings. However, that also poses risk because used loans tend to go to borrowers with lower credit.
The lender was rescued as part of the U.S. government's broader bailout of the auto industry. Ally is about 74%-owned by the government after receiving more than $17 billion through the Troubled Asset Relief Program.
Plans for an initial public offering were halted last year as mortgage-related losses weighed on the company. It is now trying to sever itself from Residential Capital, its mortgage subsidiary that Ally may put into bankruptcy proceedings in the coming weeks.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; [email protected]
--Jeff Bennett contributed to this article.