Ally Financial is enjoying the spoils of the nationwide auto-finance boom and does not expect it to end any time soon.
The Detroit lender reported Wednesday that its consumer auto originations rose 23% in the third quarter, when compared with the same period a year earlier. The firm's auto-finance business reported quarterly profits of $415 million, a 22% increase from the third quarter of 2013.
And despite strong competition for car loans, Ally lowered its provision for loan losses by 28% from a year earlier, a signal that the company believes its losses will remain manageable.
"We still expect credit losses to increase from their current levels, but we don't expect them to increase as much as previous estimates," Ally Chief Financial Officer Christopher Halmy said during a conference call. "So as we look out the next 12 months, we just don't expect a significant increase in the overall chargeoffs."
The $150 billion-asset Ally gave the favorable outlook on credit despite the fact that the company expects used-car prices, which have hit historically high levels this year, to fall by about 6% between the third and fourth quarters. Lower used-car prices mean that Ally's assets are less valuable when consumer auto leases end. Ally is one of the nation's largest sources of auto leases.
"Used-car prices have been good," said Christopher Donat, an analyst at Sandler O'Neill. He noted that Ally may have been factoring an expectation of falling prices into the terms of its leases.
Another reason that Ally is expressing optimism about credit: the mix in its auto-loan portfolio is skewing more toward borrowers with higher credit scores. Industrywide, the percentage of auto loans to borrowers with low credit scores has been rising, according to Experian.
Ally Chief Executive Officer Michael Carpenter acknowledged Wednesday that competition for auto loans is intense, but he said the situation is not getting worse. "And in fact, I think to some degree in the third quarter we saw some competitors back off a little bit," he told analysts.
Despite the stiff competition for auto loans, Ally's net interest margin rose in the third quarter, as the company's cost of funds fell.
Overall, Ally reported net income of $423 million in the first quarter. Adjusted earnings per share were 53 cents, which beat analysts' consensus expectation of 42 cents.
Shares in Ally rose 2.8% Wednesday but remained about 5% below their level at the end of trading on April 10, the date of Ally's initial public offering.
One factor that may be holding down Ally's stock price is the U.S. government's 11.4% ownership of the company, a legacy of the firm's 2008 bailout.
Carpenter was asked Wednesday whether he still believes the government will sell its stake by the end of 2014. He gave a noncommittal answer, saying that the decision rests with the Treasury Department.
"I'll be the first to say I had expected that we would be making more progress on that front than we have, or they have," Carpenter said. "I would point out that this is not something we control or influence; it's absolutely their decision."