Off-lease vehicles present opportunity for Ally Financial

DETROIT — As the auto retail industry braces for the record wave of returning off-lease vehicles to crash ashore in 2019, executives at Ally Financial say the company is more than prepared for the flood.

Lease returns are expected to eclipse 4 million units this year, according to both Edmunds and Cox Automotive, and Ally CEO Jeff Brown says the lender's flexible business strategy and diverse auto portfolio positions the company well.

"From our perspective, these are 4 million units that now have an opportunity to be financed. We think our volumes are going to stay quite strong for the rest of the year," Brown told Automotive News after Ally reported first-quarter results last week. "Beyond 2020, we'll respond to the markets."

Used-vehicle originations have made up more than half of Ally's auto portfolio for five consecutive quarters, according to Brown. Used-vehicle originations climbed 8.3 percent to $5.2 billion in 2019's first quarter, comprising 56 percent of Ally's auto portfolio. Last year, used-vehicle originations made up half of the portfolio.

Consumers have increasingly turned to the used-vehicle market as affordability challenges have arisen on the new-vehicle side. Nearly two-thirds of car shoppers are now leaning toward a used vehicle, according to a recent Cox Automotive survey. According to J.D. Power, franchised dealerships set record-high used-vehicle sales in the first quarter of 2019, moving 3.15 million units.

As automakers continue to peel back incentives and dealers focus on used-vehicle transactions, Brown said he doesn't believe Ally's used-vehicle origination levels will drop off anytime soon.

Ally, one of the top auto lenders in the U.S., is also poised for an uptick in off-lease business through its digital platforms, according to CFO Jenn LaClair. That strength stems from Ally's origins as General Motors Acceptance Corp., the former in-house captive finance arm for General Motors.

SmartAuction, a wholesale used-vehicle auction website inherited from the lender's GMAC days, not only provides Ally understanding of used-vehicle prices based on real-time sales on the site, but also pulls fee income from dealers who use the platform. Ally runs 250,000 to 300,000 off-lease vehicles through its SmartAuction platform every year, LaClair said.

Despite used-vehicle gains, Ally's total consumer auto originations fell 3.2 percent to $9.2 billion for the lender in the first quarter, driven mostly by declines in new-vehicle and lease originations.

LaClair told investors that used-vehicle originations helped offset the impact of lower new-vehicle sales.

"We've been mindful of auto ecosystem shifts and built an adaptable platform that positions our franchise for the long term," LaClair said. "At the dealer level, we aligned with trends in the used category, where momentum has continued to build."

Ally's active dealership customers grew 3 percent to 18,000, which drove 3.2 million loan and lease applications, up 9 percent from the year earlier and Ally's highest level ever.

New-vehicle originations fell 14 percent to $3.1 billion, as Ally continued to dial back on loans and leases through its Chrysler and GM channels.

Combined, originations through Ally's GM and Chrysler channels declined 25 percent to $1.8 billion.

New-vehicle originations through Ally's growth channel stayed flat from the year earlier at $1.2 billion, while lease originations declined 10 percent to $900 million. The lender's growth channel consists of franchised dealerships that represent vehicle brands other than those sold by GM or the former Chrysler Group.

New-vehicle loans accounted for 34 percent of originations, down from 39 percent the year earlier, and leases made up 10 percent, compared with 11 percent the year earlier.

Ally's auto finance pretax net income increased 23 percent to $329 million. Net financing revenue rose 7.8 percent to $980 million.

Pretax income for Ally's insurance business, which includes F&I products, rose 23 percent to $145 million.