Ally Financial, formerly known as GMAC is adding head count. In an industry as hard hit as banking and finance, any expansion is seen as a welcome sign. According to a company employee, Ally is looking to add 100 Retail Underwriters for its auto business by year-end.
General Motors sold GMAC in 2006, becoming the only major auto manufacturer without a company owned financing arm. In the fall of 2008 GMAC (Ally bank) became a bank holding company in order to survive the credit meltdown. The legal shuffling enabled GMAC in participate in the US Treasury Troubled Asset Relief Plan (TARP). GMAC has received over $16 billion in bailout funds from the US taxpayer. In May 10th of this year, GMAC changed its name to Ally Financial.
General Motors looking to grow its business needed to come up with a plan in a market that is projected to sell only 11.2 million new cars and light trucks in 2010. Ally Financial is already purchasing nearly 90% of the new vehicle financing contracts from its GM dealers. Banks like Wachovia Dealer Services, Wells Fargo Auto Services and Chase are buying the majority of the used vehicle contracts.
If Ally expands into the subprime market for used vehicles and exerts pricing pressure on the prime side of the business, GM can grow its business in a market where the average consumer is still nervous to make a large purchase. GM dealers are tired of turning away willing buyers and Ally Financial, possibly in response to General Motors CEO Ed Whitacre considering additional outside financing partnerships or creating in-house financing is answering the call to provide more support to the dealer community. Near zero interest rate loans from the Fed reduces the severity of the risk.
The move by Ally should provide a small spark to the struggling auto industry. The other banks and auto finance companies will respond to Ally’s expansion by re-examining their own credit and pricing policies. Each bank will have certain segments of its portfolio that are performing at or above expectation and these segments will be looked at when banks consider loosening underwriting standards. Underperforming portfolio segments may be re-evaluated and adjusted to find a niche where price reduction will result in additional loan volume and profitability. The object of this delicate game of chess is to avoid losing market share.
So, who are the winners and losers? Some consumers will get lower interest rates. Other borrowers who were deemed too risky in this market will now be able to secure vehicle financing.
In the short-term, Ally Financial and its competitors should benefit if they are able to manufacture demand in the market through a loosening of lending policy. Ancillary business such as warranty providers will also benefit from the increased business.
The banks and finance companies will have to wait 12 – 18 months to determine the success of their expansion. If the banks made smart loans, profitability will rise. On the flip side if the banks took too much risk, losses will rise again, hurting profitability and threatening whatever gains the market achieved.
Credit This! 