Ally Financial reported that $14.8 billion of its $41 billion in total auto financing originations in 2015 stemmed from installment contracts for used vehicles. The figure marked a rise of $3.1 billion year-over-year.

Chief executive officer Jeffrey Brown reiterated why the used-vehicle portion of its portfolio is so valuable, especially in light of expectations that charge-offs likely will tick higher as 2016 rolls along. When Ally shared its fourth-quarter and full-year financial statements, investment observers asked Brown about the potential impact if used-vehicle prices soften by 5 percent or more this year.

“Obviously the amount we lend against the car and the (loan to value ratios) are determinant on those used-car prices,” Brown said. “But keep in mind, when we originate a loan for a used car, the predictability of where the value of that car is going over the next few years is pretty consistent. We can predict that pretty well.

“Where you really see the drop off is really on a new car once it rolls off a lot and you see a much bigger drop in the value of that car and it's much harder to predict because it’s a brand new car and you haven't seen it,” he continued.

“So if we're out financing two-year, three-year, four-year old cars, believe me, from a loss perspective, we're very comfortable with that and honestly over the last year as we've gotten more and more into used,” Brown went on to say. “Where we've really exceeded from a loss perspective, where we've done better than expected really has been in the used-car channel. It's been very consistent, so I wouldn't' think that the overall drop in used-car prices that we're expecting is going to be a significant driver really of our loss rate in used cars at this point.”

Earlier in this week’s call, Ally acknowledged that its net charge-offs closed the year at 1.21 percent, a level 56 basis points higher than the 2015 low point that came after the second quarter. The finance company also noted its delinquency rate stood at 2.91 percent after the fourth quarter, a level 18 basis points higher than a year earlier.

“We continue to watch our vintages very closely and overall, we feel very good about credit trends. With stable to improving unemployment, the overall environment continues to show healthy signs and asset quality continues to perform in line or better than expected,” Ally chief financial officer Christopher Halmy said.

Another part of why Ally feels so strongly about its portfolio is it doesn’t contain as much subprime paper as perhaps the finance company originated in the past. Brown noted in his opening comments that contracts connected with customers holding a FICO score at 620 or below constitutes just 8 percent of Ally’s outstanding portfolio. And deep subprime — customers with a FICO score below 540 — comprises just 1 percent of Ally’s auto financing business, according the CEO.

“Subprime players including one that we often get compared to are well over 40 percent,” Brown said. “This is a very different model. This is a high quality balance sheet generated from the business that has been consistently profitable including during the Great Recession.”

Brown described an upward drift of 10 to 15 basis points in Ally’s charge-offs as “normalization of our mix as some of the older vintages roll off and some of the new mix that we're putting on comes on the books.” He pointed out that during the worst parts of the Great Recession, the levels were more than double the most recent readings. And during that span, Brown insisted Ally had only one quarter where its charge-off rate climbed that high.

“When we think about the overall book, where we’re going, the originations we put on, we think this book is going to be very profitable even through a crisis,” Brown said.

Overall performance

Ally indicated that its core pre-tax income for 2015, excluding repositioning items, improved 11 percent year-over-year to $1.8 billion with $446 million of that amount coming during the fourth quarter.

That $41 billion in auto financing originations for the year marked a 35-percent climb. Ally highlighted the improvement came as the result of successfully replacing and exceeding the reduction in General Motors subvented and leasing originations in Q4. The company added origination volume also was driven by year-over-year growth in the non-subvented new-vehicle channel, which was up 33 percent, and in the used-vehicle channel, which was up 27 percent.

“Ally’s performance in 2015 reflected the fundamental strength and adaptability of our operations and the successful execution of the multi-year plan to improve profitability,” Brown said.

“Our auto finance business is more diversified than ever, and our leading presence in the industry enabled us to shift capital from incentivized business toward retail auto contracts and post $41 billion in auto originations last year, which will be a significant contributor toward a consistent earnings stream in the future,” he went on to say.