As major banks pull back on subprime originations and tighten credit in the auto finance sector, Ally Financial Inc. sees an opportunity to selectively capture nonprime borrowers normally swept up by the banks, while keeping its risk adjustments stable, the company said during its financial outlook conference call today.
“I’ve said this for years, the first blip of some [underperforming] credit, you’re going to see a lot of the big banks get out, and that’s what they’re doing,” said Chris Halmy, chief financial officer at Ally. “We think that provides real opportunity for people like ourselves in the market, who are committed to this [auto] market and committed to our dealers, to be able to take some [profits], and we’re willing to do less volume to do that.”
Ally’s strategy in 2016 focused on “the belly of the curve” — lowering originations in superprime and subprime categories. However, Ally also did less volume in the nonprime segment as well, “particularly on the back half of the year and into 2017,” said Chief Risk Officer Dave Shevsky. He said this was due to “underwriting pricing adjustments” given deteriorating performance metrics.
This means that while underwriting will be tighter at Ally, the company doesn’t plan to expand its super prime portfolio or nonprime volume. The company also plans to be more selective about what nonprime borrowers it does originate in order to boost profitability, execs said on the call.
Ally is also “closely watching” the interest rate environment which it projects will continue to rise both across the market and for their own underwriting. Losses have also risen in the first quarter, but Ally believes this is due to seasonality and delayed tax refunds.
“Importantly, we have not seen this deterioration drift into our prime credit tiers, which is expected as the underlying macroeconomic factors, such as unemployment rates, wage growth, and consumer confidence are still all very strong,” Halmy said.
