The nation's largest auto lender is dismissing comparisons between the subprime mortgage bubble and the more recent boom in car loans.
During a conference call with analysts on Thursday, executives at Ally Financial sought to dispel concerns that losses may soon rise in the lender's $63 billion retail auto loan portfolio.
The $158 billion-asset Ally is far more exposed to the auto sector than other big U.S. banks. Retail car loans currently make up about 56% of the firm's total loan portfolio, and some investors are anxious about Ally's concentrated exposure to a sector that many see as frothy.
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The increasingly troubled sector often draws comparisons to the subprime mortgage market of the 2000s. But the more apt analogue is the auto-lending sector of the 1990s.
March 16 -
At a time when regulators, prosecutors and the media have stepped up their scrutiny of subprime auto lending, some in the industry have changed their definitions of key terms in ways that downplay the risks involved.
May 26 -
The public focus on whether Ally should pursue a sale has obscured other issues being raised by the firm's unhappy shareholders.
January 31
There are also concerns about the lender's exposure to subprime borrowers. The percentage of Ally auto loans that were made to borrowers with credit scores below 620 rose from 11% in 2014 to 14% last year, before dropping back to 12% this year.
Ally has been striving to become less reliant on auto lending. So far this year, the company has unveiled plans to start offering credit cards and mortgages, and also announced the acquisition of an online brokerage firm.
Thursday's conference call was scheduled in late July and was billed as a primer on credit risk management, with a focus on auto lending.
One slide in the company's presentation was titled "How Auto Lending Differs from the Mortgage Bubble." The presentation made the rather pedestrian point that Ally expects the cars it finances to decline in value — unlike the frequent assumption made during the mortgage bubble that home prices would keep rising.
"Nobody is making speculative investments in Chevy Tahoes," noted David Shevsky, chief risk officer at the Detroit-based firm.
Ally also noted that it does not make auto loans that have interest-only periods or negative amortization schedules. And the company does not offer cash-out refinancing for the vehicles it finances.
In the U.S. mortgage market last decade, loans with those features were commonplace, and they contributed to soaring default rates when home prices eventually dropped.
Ally's comments highlighted frustrations inside the auto-lending industry over the perception among some investors that the sector is in the late stages of the credit cycle.
In the first quarter of 2016, the total volume of U.S. auto loan balances hit $1.05 trillion, which was up 11% from the same period a year earlier, according to Experian. The 30-day delinquency rate ticked up from 2.02% to 2.10%.
One of the auto-lending practices that has drawn criticism is the more frequent use of longer loan terms. Loan terms of 72 months or longer result in smaller monthly payments, but they also introduce greater risk by reducing the value of the vehicles used to secure the loans.
Ally said Thursday that it began offering 84-month loans nationally in 2015, two years after the company began testing the product in specific states.
"And we're very pleased with the performance we're seeing," Shevsky said.
"You do introduce incremental risk with longer-term loans, all else being equal, so we place more stringent transaction requirements on this segment. It is only available to prime customers. And, importantly, we price for the additional risk."
Ally's stock price currently sits at about 25% below its initial public offering price from April 2014, though shares in the company have rebounded by about 15% since late June, when the Federal Reserve Board
Its shares closed at $18.30 Thursday, up 1.7%.
