Ally Financial chief executive officer Jeffrey Brown articulated a host of reasons why the finance company’s $800 million decline in originations year-over-year is not a cause for concern, as it set records in other metrics associated with first-quarter originations.

Brown asserted that Ally’s originations “remained strong” as they came in at $9.0 billion, down from $9.8 billion in the prior-year period.

Brown said when the company hosted its quarterly conference call that the finance company received a record number of applications during Q1. What did drive originations, according to Brown, were gains in what Ally classifies as its Growth channel: paper coming out of non-General Motors or non-Chrysler dealerships.

Furthermore, Brown mentioned another record as 45 percent of Ally’s Q1 originations were attached to used vehicles — the highest level in company history.

Brown reiterated points the company made during its annual Investor Day that Ally is deploying what it’s dubbing a disciplined originations strategy with an emphasis on asset quality and loan profitability in its continued effort to allocate capital efficiently. 

“We are prioritizing at expanding profitability not targeting specific origination levels and you will see that came through our metrics this quarter,” Brown said during Ally’s latest call with investment analysts. “We are committed to using capital efficiently, generating business that drives the right returns while also preserving our leading position in the marketplace.

“We continue to maintain robust credit discipline,” Brown continued. “The aggregate net loss rate was up slightly to 64 basis points in the quarter and fully in line with expectations. Nonprime originations were 12.6 percent. Nonprime, in particular, is a space you have to be constantly focused on smart risk allocation and only book assets when you can generate the appropriate economics.”

The Ally CEO then elaborated about the less-than-prime paper the finance company is bringing into its portfolio nowadays.

“As we sought to expand margins during the quarter by raising pricing, we simply originated less nonprime volume and we are completely fine with that. But generally, we feel good originating in this range and we continue to focus on the higher end of nonprime contracts,” Brown said.

“Overall application flow was the strongest in the history of the company. So, we are able to book the kind of business that fits within our holistic strategy. Our approval rates and even book-to-look rates declined this quarter, as we are being even more selective on what comes to the balance sheet,” he went on to say during his opening comments.

Later during the call, a Wall Street observer still wondered why Ally chose to pull back on subprime originations at the same time the company raised pricing.

“I wouldn’t characterize it that way,” Brown replied. “I would characterize it like that we were looking to expand margins across the credit spectrum and we did that with price. As we did that, we saw less volume come in on the nonprime originations and less volume come in really on the super prime originations. So there was no credit concern in our mind. It was much more about making sure we get the appropriate risk-adjusted profitability and we start to really expand our margins. And because of that, we lost some business.”

Overall Q1 performance

Ally reported that its first-quarter net income came in at $250 million. That’s down from the year-ago figure $576 million, which included a one-time gain of $397 million from discontinued operations resulting from the completed sale of the Chinese auto finance joint venture.

The company computed its core pre-tax income at $412 million in the first quarter of 2016, increasing from $299 million in the comparable prior year period, which included a $190 million repositioning expense related to the early extinguishment of high-cost legacy debt. The company reported core pre-tax income, excluding repositioning items, of $419 million in the first quarter of 2016, compared to $490 million in the prior year period, primarily due to a $65 million net gain on the sale of Troubled Debt Restructuring (TDR) mortgage loans a year ago that did not repeat.

Within just its auto finance division, the company indicated pre-tax income rose to $337 million in Q1, up from $306 million in the year-ago period. Ally highlighted that results for the quarter were primarily driven by strong net financing revenue due to continued growth in both new and used retail loans, which more than offset lower lease volume.

“Ally’s first quarter results demonstrate the strengths of our operations, and highlight the significant progress made to further diversify and grow as a leader in digital financial services,” Brown said. “We remain fully committed to exploring all options to enhance shareholder value. From our announced acquisition of TradeKing, which will further expand our digital offerings, to efforts to rationalize our capital structure and pursue share repurchases and shareholder dividends, our priorities remain centered on driving enhanced returns and growing shareholder value for the long term.

“Ally’s auto finance operation continued to post consistently strong profitability,” Brown continued. “As a result, pre-tax income was up 10 percent over last year, and risk adjusted returns far outpaced losses. This is a testament to our ability to adapt to an evolving marketplace, including expanding relationships with online auto retailers that specialize in offering used vehicles in an innovative way to a growing base of customers looking for a digital auto experience.”

Assessment of stock price

As presumably well that Ally appears to be doing on the performance side, investment watchers still questioned why the company’s stock price is not as strong as perhaps it could be. One call participant asked Brown about what more Ally could do to enhance its value.

“Obviously, it drives all of us mad inside the company and at the board level as well because we see how much value is here,” Brown said. “I think it comes back to continuing to execute the path we are on and adjust if needed. And so we heard a lot of feedback from shareholders last quarter about making sure capital is front and center and we took some additional actions. Again hopefully you saw that in the first quarter on what we did on pricing, what we did in moving some lower returning assets off balance sheet.

“So part of that is just continuing to remind the world that we get it,” he continued. “Also emphasizing that credit is not nearly an issue like maybe is perceived in the markets today.

“I think what's one of the big questions what's on the minds of investors and obviously we spent a lot of time talking to investors and I think, frankly last year the fact that we were able to offset the lease dynamic,” he went on to say. “A lot of people questioned, ‘Did you do something stupid on credit?’ We try to remind the world, no, we haven’t. We are very disciplined on what we underwrite . We feel very comfortable with that. And so part of this is, continuing to prove that credit really is not going to be an issue.”

Brown closed his thought by touching on his overall perception of auto financing.

“We don’t fear that there is some credit bubble or burst that's going to come at us,” he said. “And we still think the auto sales environment can be healthy.”