Mortgage

Ally's diversification efforts are beginning to repay

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

The Detroit-based company had some issues along the way. In 2019, Ally ended a credit card partnership with TD Bank. Last summer, the purchase of a subprime card issuer for $ 2.7 billion ended due to the economic impact of the COVID-19 pandemic.

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

Last year, Ally raised $ 4.7 billion in home loans, up 74% from 2019. The mortgage unit, which aims to appeal to home buyers looking to borrow online, reported pre-tax income of $ 53 million in 2020, up from $ 40 million the previous year.

Meanwhile, the unsecured loan segment had loan volume of $ 503 million for the full year, up 75% from 2019. While the deal is not yet profitable, CFO Jennifer LaClair said this was mainly due to new accounting regulations requiring lenders to reserve for losses over the life of a loan that make it more difficult to achieve profitability during a period of rapid growth.

Ally's digital brokerage platform, a third pillar of the company's diversification strategy, also saw strong customer growth, although earnings were hurt by the surge in free online trading.

In an interview on Friday, LaClair attributed the rapid growth in new consumer goods largely to Ally's 11-year-old digital bank, which provides depositors with a gateway to additional offerings. Existing depositors account for more than half of Ally's new mortgage volume, and the same pattern applies to new broker account holders.

"Our new businesses are scaling based on existing customers," LaClair said in a comment that followed the company's fourth quarter earnings report. "We have been able to do this very efficiently through the digital deposit platform. To the extent that we can use this as a gateway, we have an incredibly low initial cost for these other products."

Of course, Ally continues to be heavily reliant on auto loans, which comprise roughly 60% of the company's $ 176 billion in assets. Residential mortgages and unsecured consumer loans made up around 9% of the balance sheet last year.

LaClair said Friday that it saw a clear path for Ally to quadruple its unsecured consumer loans to $ 2 billion a year. The business known as Ally Lending emerged from the acquisition of Health Credit Services in 2019, valued at $ 190 million. The company offers point-of-sale loans in partnership with healthcare providers, contractors and retailers. Loans for home improvement projects have received a boost from changes in consumer habits during the pandemic.

The home loan business known as Ally Home grew out of a partnership with the digital mortgage lender Better.com. Ally's return to the mortgage business came a few years after the demise of Residential Capital, a subprime mortgage unit of GMAC, as Ally was formerly known, which lost $ 9.2 billion between 2007 and 2009 and was later liquidated.

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

Ally reported net income of $ 687 million, an 82% year-over-year increase due to both lower loan loss provisions and higher revenue. Ally has benefited from strong consumer demand for cars during the pandemic, which has boosted credit volumes and boosted used car prices, reducing losses on bad credit.

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