Ally, Santander Score Regulatory Wins for Investors

Ally Financial Inc. and Santander Consumer USA both scored regulatory wins this week that impact their ability to repay investors, which could be a signal of saturated growth in the auto finance industry.

For Ally, the Federal Reserve this week released the bank from a commitment it made in the wake of the financial crisis, the company said in a press release. The bank was required to maintain a leverage ratio — a percent of shareholder equity to total debt outstanding — of 15% and is now expected to send $2.9 billion back to investors as a dividend in the third quarter, according to the release.  

“The release of these application commitments is a significant milestone for the company,” Ally Chief Executive Jeffrey Brown said in the release. “This development completes the process of normalizing our regulatory framework, allowing us to optimize our capital and funding structure on a level playing field with other banks, and is a critical step in ensuring we remain on track for delivering on our financial and strategic objectives.”

Santander Holdings USA had a similar victory this week when the Federal Reserve Bank of Boston agreed to terminate a 2014 written agreement. The order required Santander to obtain prior written approval from the Fed before it declared, paid dividends, or made any capital distributions to shareholders — including the bank’s subsidiaries, such as Santander Consumer USA.  

“This underscores the key improvements we’ve made to strengthen our capital position, risk management, and governance,” Scott Powell, Santander US chief executive, said in a press release. “We are now moving into a normal capital approval cycle, like most large banks in the U.S. While there is still more work to do to fully address our outstanding regulatory issues, we believe these announcements represent a turning point for us.”

So, what does all of this investor news mean for the auto finance industry?

First, regulators are trusting these institutions more and recognizing changes both companies have made in their compliance programs, as both noted in their press releases.

Second, dividends are typically paid out to investors when there is saturation in the market, and it would be counterproductive for the bank to reinvest it in operations. As both Santander and Ally pull back their auto originations, more dividends to consumers underscores their stated strategy of seeking greater loan profitability, rather than pushing for volume and marketshare.