Ally Financial

            Ally Financial has paved a path to success as being the largest floorplan and retail automotive lender in the automotive industry. Founded in 1919 under the name General Motors Acceptance Corp (GMAC), the company has faced several hardships, rebranded, and expanded into new product divisions that have gained attention from consumers and top finance industry players. As a credit lending intern for Ally Financial’s dealer financial services I gained experience in the company’s core service of commercial lending.

            The 2008 and 2009 recession, limited auto consumers from obtaining financing for retail vehicles and automotive dealerships could not obtain financing for automotive inventory. Consequently, GMAC was one of several automotive companies issued a bailout as the government refused to allow the auto industry to crash. GMAC repaid the $17.2 billion bailout loan plus a premium, a total of $19.6 billion. In April 2014 the US Treasury sold its last stake in the company and GMAC rebranded into Ally Financial (Ally). Then CEO, Michael Carpenter, publicly voiced their new strategic plan of getting out from under the government’s thumb and focusing all efforts into strengthening the auto finance and direct banking franchises.

Today, revenue drivers for Ally include Ally Bank, commercial auto, retail auto, mortgages, wealth management, commercial finance, and insurance[1]. Ally Bank was named ‘Best Online bank’ for the 5^th consecutive year by MONEY® Magazine and most recently surpassed $70 billion in customer deposits. Ally uses cash “inventory” from deposits to fund bank products. A strategic Ally objective is to have as low a cost of capital as possible which is a primary reason for growing the Ally Bank franchise without brick and mortar locations. Cash “inventory” is available to automotive dealers to fund their operations (i.e. financing vehicle inventory from the manufacturer). Dealers pay back these inventory loans principle plus interest; however, the true spread for Ally is the difference of the cost of bank deposits and the interest they charge dealerships/retail customers minus operating expenses. Ally’s financial services for automotive dealerships include inventory financing for inventory, consumer retail, leasing, vehicle service contracts, commercial loans, and vehicle remarketing services. Strong customer relationships are built within the commercial auto division with automotive dealerships. The consumer retail is focused on making profit driven by the creditworthiness of the borrower. The lower the ability of the customer to pay back the loan, the higher the spread needs to be. The Wealth Management division profits are primarily from transaction and management fees. Transaction fees are the cost of customer directed trading. A management fee is determined as a percentage of assets taken and traded on behalf of the client. The corporate finance division is driven by the Ally team’s ability to fund the private equity market through creating floating rate debt and developing strong relationships with private equity firms. Borrowers within the middle-market use funds for working capital, capital expenditures, acquisitions, and restructurings. Ally Insurance provides mechanical insurance coverage to automotive retail customers whose vehicle might break down and to automotive dealerships to provide coverage for their vehicle inventory. The business model is for Ally Insurance to charge premiums to cover future losses. Additional profit is realized by investing the money received from premiums (Bazzy, 2017).

It is a unique time for auto lending competitors as car sales are forecasted to decline this year making the floorplan inventory and retail market penetration a top priority (Padden, 2017). Ally prides themselves to be the largest auto lender in the country[2] striving to combine the benefits of two types of lending options: a lending ‘captive’ and a big bank. An inventory lender is considered a captive when the dealerships Original Equipment Manufacturer (OEM) also provides inventory financing (i.e. a General Motors dealership financing their vehicle inventory through General Motors Financial). Captives can offer incentivized financing deals exclusively through their dealers and consumers with subsidized rates and allow dealers to be “more aligned with the OEM” (Padden, 2017). In an interview with Auto Finance News, commercial market executive for Bank of America, Derek Comestro, claimed a downside to captives is their one-size-fits-all approach to inventory financing needs.  Banks such as Bank of America or Wells Fargo are another option dealers have for inventory financing. As David explains it, the retail banks tailor inventory financing arrangements to clients that are ‘targeted and solution-based’ while having the opportunity to offer other bank products.  Since banks primarily fund their automotive lending on deposits, captives cannot compete with the low cost of funds that banks offer. However, once the economy is down, banks ‘bow out of the market’, leaving captives to be the lending service provider with a committed relationship to dealers. Ally is a combination of both these financing options. Like a bank Ally tailors lending arrangements based on the needs of the client and uses deposits to fund lending providing low, competitive rates. Similar to captives, Ally will not “bow out” of providing inventory and retail lending to their customers when the market is down because auto lending is their main product.

Through the wake of taking a government bailout to becoming a publicly traded bank, Ally has most recently surpassed $70 billion in customer deposits. Today these deposits fuel the core business of their auto finance division; whereas under the name GMAC, funding came from being a AAA rated institutional borrower with a 10:1 leverage ratio. Through the troubles of their parent company, General Motors, and right before the great recession GMAC was still rated the top Asset Backed Security (ABS) borrower in 2007 (Euromoney, 2007). In speaking with internship mentors about the history of the company, it has always been apparent that if GMAC had the resources of a big bank, they would be unstoppable against competitors. Throughout my summer, the southeast region’s biggest competitor, for retail financing, has been Capital One.

The role lenders like Ally play in the automotive industry are being a liquidity resource to automotive dealerships. A dealership’s liquidity needs are attributed to the size and scope of the business. Without a lender, auto dealers would not be able to maintain an adequate supply of vehicles to support consumer demand or the seasonal push from OEMs. The OEMs must sell vehicles to dealerships to make money and dealerships must sell vehicles to retail customers to make money. However, auto dealer’s capital requirements of maintaining proper inventory levels would not be possible without lenders. Liquidity is essential to the growth of dealers as they plan to increase sales and margins. Automotive dealerships in the pre-1980s leveraged equity in used vehicle inventory to supplement working capital needs and generally only floorplanned new vehicles with lenders. However, with continued availability of inventory funding, dealerships now floorplan both new and used vehicles to fulfill working capital requirements (Oliver, 2017). Ally is the key lender in providing dealers with loans to leverage vehicle equity.

The role of an auto lending portfolio lender is highly correlated to the cyclical nature of the economy. In an economic downturn, consumers are not as active in the market and dealers suffer from decreased net sales. Additional risk for dealers is aging of inventory. With the combination of manufacturers pushing out units, dealers struggling to sell cars, and lenders more hesitant in providing funds, cash and liquidity becomes a more valuable commodity to manage the high and low cycles of automotive sales. It is more expensive and more risky to lend funds in this type of economic environment. When the retail sales remain low at automotive dealerships for extended periods, a portfolio manager in automotive finance will see more dealers struggling to maintain adequate working capital, increased focus on reducing loan balances on aged inventory, big banks backing out of the auto market with a shift to less risky markets, increased focus on sales of cost effective vehicles, and an increase in the cost of funds (Oliver, 2017).

A current event that could provoke an automotive economic downturn is President Trump’s threat of dissolving the North American Free Trade Agreement (Mayeda, 2017). The potential of increased tariffs between the United States and Mexico, a top automobile producer, could make it more expensive for the automotive industry to operate. Trump’s main goal is to reduce the $78 billion trade deficit the United States had with Mexico last year. The Alliance of Automobile Manufacturers said in a letter on the topic, “Disrupting this integrated supply chain[3] would increase prices, lower sales, threaten exports and endanger American workers’ jobs”. The upcoming months will be crucial to the dealerships as their capital requirements may be strained if vehicle sales are adversely impacted.

This has been an exciting time to be a credit lending intern for Ally Financial as the automotive industry is “really the center of the basic debate [that’s] going on right now” (Mayeda, 2017). In observing the true people-oriented nature of this company, I believe in the growth potential for consumer deposits and its competitive edge compared to others in this industry. It is automotive lenders that allow the business between manufacturers, dealerships, and consumers to obtain financing. The future of Ally, although uncertain with the nature of economic cycles, is destined to be prosperous with the determination to “Do It Right” and outstanding customer satisfaction.

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[1] Information on Ally revenue drivers was compiled from an Intern Learning Session entitled “How Does Ally Make Money?” The presentation was conducted by Ally Human Resource manager Tarik Bazzy.

[2] When Ally began as GMAC in 1919, they originated the business of floorplan lending in Detroit, Michigan.

[3] As stated by the Alliance of Automobile Manufacturers, NAFTA helps create an integrated supply chain that “sees many auto parts cross the U.S. border at least eight times before a vehicle is assembled”.