Fitch: Ally Expected to Be Hurt by GM’s Emphasis on Leasing

Fitch Ratings said General Motors’ higher emphasis on offering its customers lease options through its captive General Motors Financial (GMF) subsidiary poses another challenge for Ally Financial and could pressure the bank to weigh other potentially higher risk avenues to support its growth.

Fitch noted that the loss of the GM contract will reduce Ally’s exposure to residual value risk which Fitch views positively given the current environment – one characterized by elevated used vehicle pricing and intense competition.

Ratings assigned to Ally (BB+, Outlook Stable) and GMF (BB+, Outlook Positive) are unaffected by the development at this time, as Fitch had anticipated this possibility for some time, given GM’s stated objective to grow GMF. That said, longer-term rating implications will be influenced by Ally’s response to the forgone business.

Ally confirmed last week that GM would offer sub-vented leases on several of its popular brands exclusively through GMF. This development adds to a number of headwinds facing Ally and the auto finance industry more broadly, including normalizing credit performance, intense competition and pricing pressure, as well as elevated regulatory and litigation risk.

Ally’s total lease origination volume for the three brands affected, GMC, Buick and Cadillac, accounted for 12.7%, or $5.2 billion of Ally’s $41 billion in total originations in 2014. Fitch believes Ally’s remaining GM sub-vented products, which include leasing for Chevy vehicles and loans on GM vehicles, remain at risk. Combined, these remaining products accounted for $8.1 billion or 20% of Ally’s total 2014 originations.

Despite the loss of GM sub-vented lease volume, Ally remains confident that it will achieve origination volume in the high $30 billion range in 2015. Fitch believes the target is potentially achievable but reaching it will pose challenges and may lead to growth in potentially higher risk areas to meet shareholder expectations.

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Terry Mulreany
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