April 27, 2012
NEW YORK — Along with commenting this week on Chrysler Group’s decision not to renew its current auto finance operating agreement, Ally Financial reported a rise in auto loan orginations as part of its first-quarter financial statement.
Ally’s total first-quarter U.S. auto originations settled at $9.7 billion, up from the fourth-quarter amount of $9.2 billion. However, the figure was off from the year-ago total of $11.6 billion.
“Consumer financing origination levels in the first quarter of 2011 were driven by a significant increase in automaker incentive programs during that period,” Ally pointed out.
Ally’s loan business associated with used vehicles moved higher quarter-over-quarter, as well, ticking up to $2.6 billion from $2.3 billion.
Fueling those quarter-over-quarter loan rises was a jump of 39,000 extra contracts as Ally reported 376,000 total contracts originated during the first quarter. The company indicated 59 percent of those loans coming out of General Motors dealers were subvented, the highest level dating back a year. Ally noted 48 percent of loans originating at Chrysler dealers were subvented, an amount flat from the previous quarter.
The average term for all of those contracts was 67 months, according to Ally.
North American Automotive Finance, which includes Ally’s results for the U.S. and Canada, reported pre-tax income of $442 million for the first quarter compared to $518 million in the corresponding prior year period.
Executives explained net revenue was lower as lease margins declined primarily due to lower gains on termination volume and the run-off of higher margin legacy assets. They added the shift was partially offset by favorable retail asset growth, despite tighter retail margins.
Ally also said its pre-tax income during the quarter was also negatively affected by lower servicing fee and remarketing fee income, and a higher loan loss provision as a result of consumer asset growth, partially offset by improved credit performance. The company added its pre-tax income also benefitted from lower noninterest expense.
Executives shared earning assets, which are on-balance sheet assets comprised primarily of consumer receivables, the consumer held-for-sale portfolio, leases and commercial receivables, for North American Automotive Finance totaled $102.1 billion, up 17 percent compared to the end of the first quarter of last year.
Ally determined consumer earning assets totaled $67.7 billion, up 21 percent year-over-year, as the company found strong originations outpaced the legacy asset run-off.
The company went on to note commercial earning assets grew to $34.4 billion as of March 31, compared to $31.6 billion at the end of the comparable prior-year period.
“The year-over-year increase was largely driven by higher dealer inventories to support growing auto sales overall,” executives explained.
Chrysler Declines Financing Renewal
In other news, Ally offered a lengthy reaction to Chrysler’s decision not to renew its current auto finance operating agreement.
The automaker’s decision means that Ally will no longer be the preferred lender for consumer loans and leasing, as well as for dealer floor planning, as of April 30, 2013, the expiration date of their initial contract.
Ally officials acknowledged, “This notification was expected and is required in order to enable both companies to continue discussions on how to evolve the terms of the relationship.
“The existing agreement was put in place in April 2009 to support Chrysler’s emergence from bankruptcy and the company’s business plans through April 2013,” they continued. “Ally was pleased to broaden its network of automakers and dealers and fulfill its core mission of supporting the U.S. auto industry.”
Ally said that the current agreement provides preferential treatment for the subvented retail financing business only.
“Ally competes in the marketplace for all other parts of the business with Chrysler dealers such as wholesale financing, standard rate consumer financing and leasing,” Ally officials emphasized.
“In the first quarter of 2012, the Chrysler subvented business accounted for 5 percent of Ally’s total U.S. consumer originations, while the standard rate business accounted for more than twice that amount at 11 percent,” they tabulated.
“Chrysler and Ally continue to have constructive discussions about the future relationship,” Ally officials went on to say. “Ally expects to continue to play a significant role with Chrysler dealers in the future as the dealer is Ally’s direct customer for the majority of business that is conducted. Ally remains committed to offering all dealers the most comprehensive suite of products and services in the industry that drive value for these businesses.”
Chrysler indicated that it produced necessary notice to satisfy the agreement’s requirement that notice of nonrenewal be provided at least 12 months prior to the date of expiration.
“Under the agreement since April 30, 2009, Ally has provided wholesale financing to our dealer network and retail financing to our customers in the U.S. and Canada,” Chrysler reiterated in its Form 8-K to the Securities and Exchange Commission.
“We are required during the term of the agreement to ensure that Ally finances a specified minimum percentage of the vehicles sold under certain of our subvention programs, and to repurchase Ally-financed inventory from dealers upon certain triggering events,” the company continued.
“We are currently pursuing various ways to optimize the financial products and services available to meet the needs of our dealers and customers in the U.S. and Canada,” Chrysler officials went on to say. “We have already begun discussing these alternatives with a number of financial institutions, including Ally.”
Back in February, the Wall Street Journal reported that Chrysler already was talking to several major lenders including Ally and J.P. Morgan Chase Co., to create a new lender. The newspaper also indicated banks approached Chrysler in the past year as its sales performance improved.
Dealer Reaction
The president of the Chrysler Group National Dealer Council believes the OEM’s announcement that it will not renew the current deal with Ally is part of the business process.
“The dealers have been made very comfortable with the idea that this is no more than a necessary contractual move,” council president David Kelleher told sister publication Auto Remarketing on Thursday. “It should be read no more than that because it’s business as usual during the current period.”
At David Dodge Chrysler Jeep in Glen Mills, Pa., Kelleher remained upbeat about the position his store and fellow franchised dealers have — no matter if Chrysler and Ally eventually can craft a new financing agreement.
“Chrysler has been going out on their behalf as well as our behalf to keep us as competitive as we can. Ally is very much involved in that from my understanding. They’re not completely transparent with us, nor should they be,” Kelleher shared.
“I know (Chrysler) is working with a couple of different sources to determine what the best course of action is for our future. My understanding is that Ally is very much involved, however, they had a contractual obligation to tender a notification 12 months out of the current contract in order to keep flexibility,” he continued.
“They were very clear with us that this was no more than an indicator of them keeping their flexibility in agreement terms or else it would have automatically extended,” he went on to say.
Kelleher touched on how much different the situation is now as compared to when Chrysler and Ally first joined forces three years ago.
“The original agreement forged was obviously in a much different place in the economy at the time,” Kelleher emphasized. “Even if we were to stay with Ally — and I think that’s still a distinct possibility — it wouldn’t be under the same terms because we were a company just coming out of bankruptcy and reforming and changing. The liquid markets have changed quite a bit as well.”
Kelleher reiterated his belief that Chrysler is working toward a financing dealer that will benefit both the automaker and its dealer network.
“From my end and the council’s end, I’m very comforted that they’re as transparent as is prudent,” Keller stated. “I don’t think it makes a great deal of sense to get into the nuts and bolts because that wouldn’t be fair to everybody. To show us the security that the OEM is working on our behalf to get us the best terms available in the market is extremely comforting and they’ve been transparent to that end.
“I have all the confidence that at the end of the day, the dealer body and Chrysler will be in a more competitive position whether it’s with our partners at Ally or whether they find the need to have to take it to another source,” he concluded.