Ally’s diversification efforts are starting to pay off

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Ally Financial, which split from General Motors in 2006, has long wanted to reduce its heavy reliance on auto finance business.

The Detroit-based company encountered difficulties along the way. In 2019, Ally terminated a credit card partnership with TD Bank. Last summer, his $ 2.7 billion deal to buy a risky card issuer has been terminated amid the economic impacts of the COVID-19 pandemic.

But Ally, which operates a digital-only bank with $ 137 billion in deposits, is starting to gain traction in two nascent credit segments – mortgages and unsecured consumer loans.

Last year, Ally issued $ 4.7 billion in home loans, a 74% increase from 2019. The Mortgage Unit, which seeks to attract homebuyers who want a borrowing experience in line, reported pre-tax income of $ 53 million in 2020, up from $ 40 million. Last year.

Meanwhile, the unsecured lending segment recorded a full-year loan issuance volume of $ 503 million, up 75% from 2019. Although the business is not yet profitable, the Chief financial officer Jennifer LaClair said that’s in large part because the new accounting rules are forcing lenders to book. for losses over the life of a loan, making it harder to break even in times of rapid growth.

Ally’s digital brokerage platform, a third part of the company’s diversification strategy, has also seen strong customer growth, although its bottom line has been affected by the boom in online commerce. free.

In an interview on Friday, LaClair attributed the rapid growth of new consumer products largely to Ally’s 11-year-old digital bank, which she said provides depositors with a gateway to additional offerings. Existing depositors account for more than half of Ally’s new mortgage volumes, and the same trend applies to new brokerage account holders.

“Our new businesses are growing with existing customers,” LaClair said in remarks following the company’s fourth quarter earnings report. “We have been able to do this very efficiently through the digital repository platform, and to the extent that we can leverage it as a gateway, we have an incredibly low acquisition cost for these others. products. “

Granted, Ally remains heavily dependent on auto loans, which account for about 60% of the company’s $ 176 billion in assets. Last year, residential mortgages and unsecured consumer loans made up about 9% of the balance sheet.

LaClair said on Friday she sees a clear path for Ally to quadruple her unsecured consumer loans, to $ 2 billion a year. The business segment, known as Ally Lending, grew out of the company’s $ 190 million acquisition of Health Credit Services in 2019. It offers point-of-sale lending in partnership with healthcare providers. healthcare, home improvement contractors and retailers. Loans for home improvement projects have been boosted by changes in consumer spending habits during the pandemic.

The mortgage lender, known as Ally Home, was born from a partnership with digital mortgage company Better.com. Ally’s return to the mortgage industry came years after the demise of Residential Capital, a subprime mortgage unit of GMAC, formerly known as Ally, which lost $ 9.2 billion. between 2007 and 2009 and was subsequently liquidated.

Still, it was the traditional auto loan business that generated profits in the fourth quarter of 2020.

Ally said net income of $ 687 million, up 82% from a year earlier, thanks to both a lower allowance for bad debt and higher income. Ally benefited from strong consumer demand for cars during the pandemic, which propelled loan volumes and boosted used car prices, reducing the scale of losses when loans go bad.

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