Ally Financial has found itself in the sweet spot the past couple of years.
It's traditionally concentrated on used-auto loans rather than new-car loans, which paid off when the pandemic stopped new auto manufacturing and demand for used cars spiked. It also targets middle-of-the-road consumers — not too prime, not too subprime — where business continues to be good.
The market rewarded Ally heavily for it last year — its stock price rose nearly fivefold from the depths of the pandemic and reached a high of around $55 per share in June 2021.
But investors now fear that after two years of sweetness, Ally will soon start to get a mouthful of sour. Its stock is down more than 40% in 2022, reflecting investors' expectation that prices for used autos will slump and that a recession may cause consumers to default on Ally's auto loans.
None of that is lost on CEO Jeffrey Brown, who has led the online bank since 2015 and joined the Detroit company in 2009, as the lender's survival was in question following the financial crisis and its 2006 spinoff from General Motors.
Brown, 49, recognized that the future of the used-car market is a "big, dark cloud" that looms over Ally and other consumer lenders, and it's spent the past two years assuming used-car prices will tumble.
But he says that he is confident the market's hand-wringing is exaggerated and that several factors will provide "structural support" for used-car prices. The shortage of automotive chips, an important component in new-car manufacturing, remains unresolved, and the lack of new-car supply should keep demand for used autos elevated over the next year, Brown said. He further noted that millions of potential customers are putting off buying a used car until prices come down, providing added support for the market against any sudden fall in prices.
Continued high prices for used autos would, in turn, cushion any blows that Ally would absorb during a recession.
That's because the value of the cars that Ally would repossess from customers who default on their loans would remain high, limiting the severity of any losses from loans that people can no longer pay back.
"We think this fear of credit is way overblown," Brown said in a Sept. 30 interview. "We think us performing responsibly through this recessionary environment that we think is going to come is going to serve as a strong catalyst for the stock to run higher and people to sort of get over the fear."
Ally's strong growth — in auto and the other businesses it's built out over the years — is not the only reason American Banker has named Brown its Banker of the Year for 2022.
It's also because Ally has played a pivotal role in what is becoming an industrywide shift: the end, or at least curtailment, of overdraft fees.
Overdraft moves
Consumer groups have long criticized overdraft fees, which at many banks are upward of $30 per occurrence, as punitive. They seemed ripe for regulatory review as the Biden administration regulators took shape, and a few banks had announced steps to help customers avoid overdrafts.
Then in June 2021, Ally announced it was eliminating overdraft fees entirely, saying in a press release that they make consumers anxious and disproportionately affect people of color.
"Overdraft fees are a pain point for many consumers but are particularly onerous for some. It is time to end them," Brown said at the time.
The reaction was swift, with Sen. Elizabeth Warren, D-Mass., calling on "the giant banks" to eliminate overdrafts. Consumer groups praised Ally for its action. In the months that followed, Capital One Financial and Citigroup scrapped overdraft fees, and Bank of America slashed its overdraft fee to $10.
The announcements from large and midsize banks have continued, and their fee revenues have declined as a result. Consumers at the 25 largest U.S. banks could save more than $4 billion a year as a result of the changes, according to an analysis this summer from the Pew Charitable Trusts.
Brown said Ally was cautious about potentially creating a "political storm" with its announcement. "We weren't doing it for political reasons or regulatory applause reasons," he said. "We were doing it because it was the right thing for our customers."
He also credited Ally Bank's president of consumer and commercial banking, Diane Morais, for spearheading the initiative. Morais ranked as No. 11 on American Banker's Most Powerful Women in Banking this year.
The decision did not have major financial ramifications for Ally, which had already waived overdraft fees earlier in the pandemic. Even before COVID, very little of the bank's revenue came from these charges.
Asked about the developments since, Brown said he's "extremely proud" that others have ditched overdraft fees and of the industry's evolution on the matter. "I think through time, you'll see others follow suit," he said.
Brown spoke a day after the Consumer Financial Protection Bureau fined Regions Bank $50 million and forced it to refund consumers $141 million for a category of overdraft fee that it previously charged.
"I think all of us [are] realizing this is a hot topic in Washington," Brown said of fellow bank CEOs' thoughts on overdraft policies. "But I hope decisions aren't politically motivated. I hope they're rooted in doing the right thing for their own customer bases."
A troubled beginning
More than a decade ago, it seemed unlikely that Ally would be a success — or that it would even be around today.
Ally was previously known as General Motors Acceptance Corp., which provided financing for the automaker's customers and had a large subprime mortgage business called ResCap. GMAC and its mortgage arm suffered major losses during the 2008 financial crisis, requiring three separate bailout payments totaling $17.2 billion.
GMAC Bank rebranded as Ally in 2009, launching a new online bank whose motto was that the world "needs a better bank." Ally wasn't shy in criticizing how other banks treated consumers — in one ad, it said "it's wrong to hide behind fine print" — and it offered much higher rates on savings in what proved to be a successful effort to raise retail deposits.
But it also shifted away from the "captive finance" model, the term used to describe auto manufacturers' in-house lenders. It instead focused on building its network of dealerships and shifted gears more toward loans for used autos.
"We evolved the auto business tremendously," Brown said. "I think it's still an underappreciated story. We are a very different auto finance company today than we were even five or six years ago."
That shift has boosted Ally's income over the years, since used-auto loans carry higher yields. It also positioned Ally well for the used auto boom that occurred when a semiconductor shortage crimped manufacturing of new cars.
Heading into the pandemic, Ally was making less than $10 billion in auto loans every quarter. It's surpassed that mark in every quarter since the start of 2021, and originations reached $13.3 billion earlier this year before slowing a bit last quarter. About 64% of its origination volumes came from used vehicles.
Ally has also entered or reemphasized other businesses over the years. Ally offers mortgages in partnership with the nonbank lender Better Mortgage Corp. It expanded into investing tools through a 2016 acquisition of the online brokerage firm TradeKing. And it's jumping into credit cards after acquiring the card issuer Fair Square last year.
All along, its online deposits have grown, helping give the company a cheaper source of funding than issuing more expensive debt in the capital markets and tapping wholesale funding. While other banks reported declines in deposits last quarter, Ally's higher rates and its branding have contributed to an increase.
"I think it's been a huge success," Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, said of the company's trajectory. "I think if there was one disappointment, it's been that the market hasn't necessarily recognized that."
'On top of everything' during BofA stint
Brown has been with Ally for most of the journey, joining the lender when it was still known as GMAC in early 2009 as corporate treasurer. He had previously spent 10 years at Bank of America, where he moved up the ranks quickly and was named corporate treasurer at 34. Brown's prior roles at BofA included leading the balance sheet management division and trading mortgage and derivatives products.
"He was on top of everything, but he wanted to do more and more and more and more," said Alvaro de Molina, an ex-BofA chief financial officer who was GMAC's chief executive from 2008 to 2009 and brought Brown to Ally.
Thanks in part to his work, BofA was "heads and shoulders above other institutions" in tracking its balance sheet and potential risks months into the future, de Molina said. That was critical at a time when — much like today — interest rates were volatile. Brown had a knack for "making the complex simple," de Molina said.
It's kind of hard to describe where his skills are. … It's like: What skills didn't he have?
But perhaps Brown's biggest achievement was hiring "very, very talented" employees at Ally, whose future years ago appeared uncertain, de Molina said. "It takes some leadership to have people want to do that for you."
Today, Brown remains a "very caring and thoughtful leader," who is "wickedly bright" but whose emotional intelligence shines through, said Kathie Patterson, who has been at Ally since 2007 and is now its chief human resources officer.
He responds to every email from staff and interns, and sets up meetings with them to discuss the ideas they've shared by email, Patterson said. And he prioritizes family — asking Patterson and other employees about their families, but also setting an example by making space to leave for his kids' school and sport events.
"That sends signals to myself, the rest of the leadership team, and the rest of the organization in terms of the importance of family," Patterson said.
Beyond 'structural repair'
As Brown describes it, when he arrived at GMAC in 2009, the company's focus was "really about survival."
The Treasury Department had injected $17.2 billion of bailout funds into GMAC, the company was figuring out what to do with its toxic mortgage subsidiary and few had any confidence that Ally would make it out alive.
Ultimately, Ally avoided bankruptcy and the U.S. government recouped the bailout funds, despite recurring doubts at Treasury that its investment would fail. Ally went public in 2014, though its stock price slid almost 4% on its first day of trading. "From bailout shame to lame IPO," a CNN headline declared.
Brown became CEO in 2015, when the mission was no longer about survival but what he calls "structural repair."
Ally had lost its preferred-lender partnerships with General Motors and Chrysler, yet the bank was able to retain its massive footprint in the auto market. Its dealer relationships have risen from 14,600 in 2012 to nearly 23,000 in the third quarter, and it offers dealers a wide array of services, from real estate loans to floorplan insurance to acquisition financing.
On top of that, Ally has done an impressive job creating "the best digital bank out there" and gathering deposits, said Vincent Caintic, an analyst at Stephens. The company now gets 86% of its funding from deposits, a cheaper funding source than wholesale funding and debt.
What remains a work in progress is its expansion into other businesses, which still make up a relatively small share of Ally's auto-heavy balance sheet, Caintic said. It's also a source of skepticism among investors, he added, some of whom "don't buy into this thesis" that Ally needs to stretch beyond its auto roots and become a full-service digital bank.
Ally's shares fell after the company announced the TradeKing acquisition, and they sank more than 11% after its February 2020 announcement that it would buy a credit card company called CardWorks.
The two companies ended up calling off the deal in June 2020, citing the impacts of COVID-19 on the global economy and financial markets.
But Ally is trying again on credit cards, closing a $750 million deal last year to buy the card issuer Fair Square Financial. The business is relatively small, with a portfolio of just $1.4 billion in the third quarter. But Brown said he sees it approaching $5 billion to $10 billion in the next three to five years, cautioning that "we have to do that in a very smart, in a very measured manner."
The company is in the process of rebranding Fair Square's credit cards and rolling out the new products to Ally customers.
"Are we going to go out and try to compete with American Express and Chase Sapphire? Absolutely not," Brown said, listing two companies with premium cards aimed at high-income consumers. "Those are well-established businesses, cards, platforms, players. They do an excellent job."
Instead, Ally will stick to its focus on prime consumers and float the credit card to its existing customers, which Brown describes as a "really loyal customer base that wants to do more" with Ally.
What the future may hold
The more immediate test for Ally is the auto market and whether a recession may lead to credit troubles.
Like other consumer lenders, Ally benefited from unusually benign credit conditions for most of the pandemic, as customers used stimulus money and their savings to pay their debts. But consumers' finances are returning to more normal levels of stress, and Ally's credit metrics are normalizing along with them. Net charge-offs in its retail auto business totaled $217 million in the third quarter, doubling the prior quarter's figure but still below pre-pandemic levels of $253 million.
While Ally now expects charge-offs to surpass pre-pandemic levels, Brown noted that Ally has protected itself by bulking up its loan-loss reserves — essentially a piggy bank that it can tap to mitigate the impact of loans going sour.
"We have reserved like crazy," Brown said, adding that he wants to hang onto Ally's reserves to prepare "for all of these unknowns that are out there." Investors appear to be more concerned about the credit outlook — Ally's stock slipped more than 8% after the company reported its earnings last month.
"There's definitely fear from the buy side right now," said Alexander Yokum, an analyst at CFRA Research.
Anand Talwar, deposits and consumer strategy executive at Ally Bank, and Jody Bhagat, president of the Americas for Personetics, explain how their technology collaboration has evolved from a virtual assistant to customized, real-time "insights" for customers.
Ally's focus on prime consumers has proved to be successful the last several years, given that the yields it makes on loans to prime consumers are higher than those in the super-prime sector, Yokum said. But taking on slightly riskier customers also makes the lender more vulnerable to a worsening economy.
"As long as it's an orderly decline, they'll probably be OK," Yokum said. "But if it ends up going ahead of expectations, that's where they can get in trouble."
The company is also grappling with what might appear to be a trickier regulatory environment for any consumer lender.
The CFPB has been one of the flashpoints: Director Rohit Chopra is going after what he calls "exploitative junk fees" in the banking industry and calling out individual banks. Banking trade groups sued the consumer bureau in September over a new nondiscrimination policy, which the trade groups called "arbitrary," "capricious" and in violation of its statutory mandate.
The CFPB has also said it is "closely watching the auto lending market" for any practices that harm consumers, particularly on repossessions and subpar servicing.
Brown played down the impact of the new regulatory environment. But he hinted that the industry is worried about regulators' approach, saying he and other bank CEOs fear "certain regulators want to regulate by enforcement."
"I'm not sure that's the best approach," Brown said. "I would hope that all regulators get rooted facts and reality first, before making broad statements and broad accusations against lenders."
For its part, Ally has long focused on doing "the right thing for our customers" and running its business responsibly, Brown said. Ally received an "outstanding" rating in its most recent Community Reinvestment Act exam, and Brown said he's proud of the "very constructive relationships" the bank has with its regulators and the frequent communication on both sides.
"When you develop that level of transparency with your regulators," he said, "it helps navigate the good times and in the tough times."
