Ally Financial’s Key Client GM a Competitor?

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February 24, 2011 by   Comments Off on Ally Financial’s Key Client GM a Competitor?

AllyBank_FeatureBox_shortAlly Financial Inc., the U.S.-owned lender preparing for an initial public offering, is bolstering ties to General Motors Co. dealers amid signs the automaker may become a rival in vehicle financing, Bloomberg News reported.

CEO Michael Carpenter held dealer meetings in several cities and broke custom by scheduling a first-ever event at the National Automobile Dealers Association (NADA) in San Francisco this month that didn’t include executives of GM, the biggest U.S. car manufacturer, or Chrysler Group LLC, said Gina Proia, an Ally spokeswoman.

Ally, the biggest U.S. new-car lender, started as a GM unit and still gets most of its business through GM and Chrysler dealers. With an IPO in the works, Detroit-based Ally wants to assure investors those dealers will remain customers for years to come, said Maryann Keller, an auto industry analyst. GM is expanding its own finance operations, marked by last year’s $3.3 billion purchase of AmeriCredit Corp.

“The number one question Ally will have to answer on the roadshow is how they can go public if their number one customer is moving away from them,” said Keller, principal of a self- named consulting firm in Stamford, Conn. “They’re going to have to tell a story about what their business model is going to be.”

At stake for Ally is almost $23 billion in U.S. retail contracts as of last year on 803,000 new vehicles. Carpenter, 63, also faces encroachment from traditional lenders like Capital One Financial Corp., which caters mainly to retail customers, and JPMorgan Chase & Co., which is targeting dealers. That’s home turf for Ally, formerly known as GMAC Inc., the largest source of funds for GM dealers and customers such as Thor Industries Inc.

Lower Scores

GM acquired AmeriCredit to help the automaker offer credit to more consumers, Dan Ammann, GM’s vice president of finance, said last year. Renamed General Motors Financial Co., the unit has expanded since the takeover and may increase loans to borrowers with lower credit scores.

GM Financial started a trial leasing program in Ohio late last year and expanded to seven states in the Northeast in January. GM may also challenge Ally’s hold on dealers by lending them cash to purchase inventory, said Duane Paddock, chairman of GM’s National Dealer Council. Ally dominates that business, providing “floor-plan” funds to 82% of GM dealers and 76% of Chrysler dealers, according to the lender.

“We have assumed that GM Financial would become a floor- plan source,” said Paddock, who owns a Chevrolet dealership in Kenmore, New York, and is co-chairman of the national dealer council’s finance committee. “GM said never say never, but certainly not today. It’s not going to happen any time soon.”

Buying Ally

The automaker’s management also has debated buying all or part of Ally, a discussion that began before the AmeriCredit purchase, three people with knowledge of the discussions said in May. CFO Chris Liddell said in June that it doesn’t make sense to carry billions of dollars in lending assets on the automaker’s books.

There are no current talks about a sale between GM and the U.S. Treasury Department, which owns 73.8% of Ally after a series of bailouts totaling $17.2 billion, said two people with knowledge of the company’s plans. They declined to be identified because acquisitions are confidential. GM sold 51% of GMAC in 2006 for $7.4 billion to a group of investors led by Cerberus Capital Management. The bailouts have since diluted that stake to 7.8%. GM still controls about 9.9%.

Banks Expand

Renee Rashid-Merem, GM’s spokeswoman, declined to comment, while Ally’s Proia said the relationship with GM “is an important and mutually beneficial strategic alliance.” Mark Paustenbach, a Treasury spokesman, said he couldn’t comment.

Other lenders are also making a push to expand their dealer business. JPMorgan has become more aggressive in lending for dealer inventory, said James Wood, who attended a meeting with Ally executives on Feb. 17 in Dallas and owns dealerships in Decatur and Denton, Texas. Capital One CEO Richard Fairbank said in a January earnings call that the McLean, Virginia-based lender has increased auto lending by “deepening dealer relationships.”

Mary Kay Bean, a spokeswoman for New York-based JPMorgan, declined to comment on whether the lender is increasing the financing or products it provides to GM and Chrysler dealers.

GM also offers leasing programs through U.S. Bancorp and in May 2010, Chrysler partnered with Santander Consumer USA, a division of Spain’s biggest bank, to offer loans to less creditworthy borrowers.

NADA Meeting

Laurie Kight, a spokeswoman for Santander Consumer USA, confirmed the company’s agreement with Chrysler and said the lender didn’t have similar agreements with other manufacturers.

The meeting at NADA, billed as the “automotive industry event of the year,” and the U.S. tour may mark Ally’s response to heightened competition, said Adam Steer, an analyst at New York-based CreditSights Inc. In the past year, Ally has also moved away from an almost total reliance on GM and Chrysler, expanding to serve Saab Automobile AB and Thor Industries Inc.

The shift at the San Francisco convention was having “our own meeting” to give everyone an update on the company as it sharpens its focus on auto lending, Proia said. In past years, Ally would have met with dealers in events hosted by automakers or other companies rather than hold its own, she said.

“The main motivation for doing this is to provide dealers specific information about Ally and what we are doing to support their business and show our commitment,” Proia said.

Biggest Lender

Ally made more new-car loans than any other lender last year, according to Experian Automotive, a Costa Mesa, Calif.-based firm that tracks auto-lending data. The company controlled about 38.2% of GM consumer loans and 45.4% for Chrysler at the end of 2010, according to a statement.

On the tour to meet dealers, Carpenter made the case that Ally’s status as a bank holding company will mean it can borrow money more cheaply than non-bank finance companies and finance the purchase of dealer inventory at lower rates, said Jim Hardick, co-owner of Moritz Chevrolet in Fort Worth, Texas, who attended the Dallas meeting.

The lender can finance dealer inventory at about 2.25%, said Tom Durant, owner of Classic Chevrolet in Grapevine, Texas. Before Ally became a bank holding company, GMAC loaned his dealership wholesale financing at 3.75%, Durant said.

“They’re trying to get the dealers on their side,” Durant said. “This has more to do with their IPO than it does with dealers.”

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