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Ally Financial sees bright side despite Q2 drop

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Ally Financial’s auto finance income fell by 50 percent in the second quarter to $600 million — but that’s not necessarily a bad thing, according to the company.

Under the Current Expected Credit Losses accounting standard, Ally must record the expense of setting aside money as a hedge against losses on all the new financing business it did during the quarter, the company said Tuesday. Ally attributed its auto income decline to this consideration and “higher non-interest expenses.”

Ally wrote $13.3 billion in auto loans and leases during the quarter, a 2.3 percent increase from a year earlier and the highest quarterly origination value since 2006. It didn’t lower its standards to achieve this growth; the average Ally auto borrower had a credit score of 685, compared with 652 a year earlier.

“Our scale and ability to adapt to changing conditions allowed Ally to generate the strongest quarter of retail auto originations in 16 years while increasing expected risk-adjusted yields,” CEO Jeffrey Brown said in a statement.

These originations required a “meaningful” upfront cost for Ally under the “CECL” accounting standard, Brown told an earnings call Tuesday.

But it “positions us well” for future accretive revenue, he said. Ally expects its second-quarter loans and leases to produce a 7.8 percent yield, up more than half a point than orginations a year earlier.

“We are kind of unapologetic” about the cost of reserves for auto and other financing, CFO Jennifer LaClair said on the earnings call.

If the expense meant Ally missed an earnings per share target but had strong loan flows, “I think Jenn and I would take that all day long,” Brown said.

Ally’s auto loan application volume fell 6.6 percent to 3.3 million during the quarter, but Brown said new auto sales were down 21 percent and used sales down 17 percent in the quarter.

The number of dealerships who borrowed directly from Ally or referred customers to Ally financing rose 14 percent to 22,408 during the second quarter.

Other results from Ally’s second-quarter earnings report Tuesday include:

  • Q2 revenue: $2.08 billion, down 0.4 percent from a year earlier
  • Q2 net income: $482 million, down 46 percent from a year earlier.
  • Q2 net income attributable to common shareholders: $454 million, down 50 percent from a year earlier.
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