Ally Financial Fourth-Quarter Profit Rises 70% -- Update

By Julie Steinberg 

Ally Financial Inc., the former finance arm of General Motors Co., said its profit rose 70% in the fourth quarter, the firm's first earnings release since it exited the U.S. government's financial rescue plan last month.

The company's earnings matched analysts' expectations, but shares fell about 1% in recent trading as the Detroit company released more details about the impact of a recent plan by GM to stop using Ally as a provider of subsidized leases in the U.S.

GM said earlier this month it would rely on its GM Financial lending arm as the exclusive provider of such leases. Leasing deals make up a substantial portion of U.S. auto financing, and auto makers often subsidize the leases by giving lenders--including nonaffiliated banks like Ally--financial support.

Ally's originations for leases of GM cars including GMC, Buick and Cadillac totaled $5.2 billion in 2014, or 13% of its total originations.

Ally executives, on a fourth-quarter earnings call on Thursday, said GM's decision would have "minimal financial impact" this year and reiterated Ally's commitment to meeting financial targets it had set out, including achieving by the end of 2015 a 9% to 11% return on tangible common equity. The profitability measurement is used by investors to compare various banks' strength.

In its most recent quarter, Ally's core auto-lending business, which has been supported by a recent strong demand for cars and trucks in the recovering U.S. economy, posted pretax income of $396 million, an increase of 45% from a year ago. Consumer auto loan originations rose 10% to $9 billion.

Chief Executive Michael Carpenter said on the call that while he expects a proportion of originations in the lease category to shrink, he expects to free up capital on the balance sheet as a result that will be deployed elsewhere.

The company said despite the loss of business stemming from the recent GM decision, it will still target the high-$30 billion range of auto originations on a yearly basis. Ally has in the past had a tight relationship with Fiat Chrysler Automobiles in addition to GM. It will also continue to expand relationships with other dealers beyond those selling GM and Chrysler vehicles, as well as other auto makers, executives said.

Those conversations have begun, Mr. Carpenter said in an interview. "It's not real hard to believe that we can replace that [lost] business with other business," he said.

The company expects the profitability of its used-car financing business to be comparable to that generated by the GM leases, Chief Financial Officer Christopher Halmy said on the call.

Separately, Ally executives said the firm will contemplate assets outside of the automobile industry now that it no longer accepts money from the government. The firm plans to expand in jumbo mortgages, for example. "Now that we're no longer a TARP institution, we have a lot more freedom to...play a little offense," Mr. Halmy said.

During the fourth quarter, Ally purchased $750 million worth of jumbo mortgages as part of an investment strategy, Mr. Halmy said, adding that high-quality jumbo mortgages are a profitable business with a good return on equity.

Since its third bailout in late 2009, Ally shed the troubled subprime-mortgage business that was the main source of its financial problems. The U.S. Treasury sold its remaining stake in Ally last month, completing a process that saw the firm deliver mostly profitable quarters since 2009.

Mr. Carpenter said in the interview that as a result of exiting TARP, Ally was able in 2014 to move its corporate finance business in its bank instead of the holding company, which "lowers the cost of funds and allows us to consider growing it."

Overall, Ally posted earnings of $177 million, up from $104 million a year earlier. On a per-share basis, earnings were 23 cents, compared with a loss of 78 cents a year earlier. Excluding certain items, earnings were 40 cents a share, the same as what analysts had expected, according to Thomson Reuters.

Ally's bank business had $48 billion in retail deposits as of Dec. 31, compared with the $46.7 billion in deposits it had at the end of the previous quarter.

John Stoll and Michael Calia contributed to this article.

Write to Julie Steinberg at [e-mail]

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