Can Ally Financial Cope With the Loss of General Motors?

Losing a business partner always hurts, especially if it's one of the biggest companies in the world. That's the situation facing Ally Financial (ALLY +0.00%). The lender's new CEO has said that it will wean itself from its relationship with General Motors (GM +0.00%) following the automaker's announcement that it will bring auto-lease financing for at least three of its four brands in-house. That's a heavy blow to Ally Financial, but the lender may not take too much damage.

One-car garage
Ally Financial and GM have been tightly linked for decades. The car manufacturer established the General Motors Acceptance Corporation in 1919, with the sensible aim of providing the financing that would help boost sales of GM's products.

GMAC lasted until the recent financial crisis, when General Motors was bailed out through the government's Troubled Asset Relief Program. GMAC was pulled from the wreckage and emerged in 2009 as a separate firm known as Ally Bank (eventually changed to Ally Financial).

Ally Financial is still essentially an auto lender, and one that's been heavily dependent on GM. Last year, over 50% of its vehicle loan originations were for GM purchases. And much of the bank's lending is in the leasing segment -- in Q4 2014, for instance, 27% of its auto loan originations derived from leasing.

Gear shifting
This is likely a key reason why Ally Financial's stock price dropped by nearly 6% the day after GM announced it was terminating much of the bank's lease origination exclusivity in favor of its recently established GM Financial unit. That decision covers Buick, GMC, and Cadillac; Chevrolet's future hasn't yet been decided, but the writing seems to be on the wall.

Ally Financial's recently appointed CEO Jeffrey Brown sounded a practical, let's-get-on-with-our-lives note in a recent interview with Reuters. He said that an eventual complete transfer of the automaker's leasing business to GM Financial "is a planning assumption we've got today."

To help compensate, the bank anticipates ramping up lending to dealers not affiliated with GM or fellow giant Fiat Chrysler (FCAU +0.00%) -- Ford (F +0.01%) is its largest non-GM/Chrysler partner-- and for used-car purchases. It will also boost its subprime auto segment.

Road-worthy
In the Reuters interview, Brown said, "I think nonprime lending can be done responsibly." True, though it's called "nonprime" for a reason: Those types of borrowers have weaker credit and are more at risk of default. Besides, the Department of Justice is sniffing around the sector, and last December it handed Ally Financial a subpoena seeking information about this end of its business.

However, the other segments mentioned are very promising. In Q3 2014, a record 54% of used-auto purchases in the U.S. were financed by loans. Ally Financial's originations for this type of loan grew by 18% year over year in fiscal 2014, reaching $11.7 billion. The total for non-GM/Chrysler financing was much lower at $8.3 billion last year, but this represented growth of 46%.

Meanwhile, Ally Financial has done a good job of adding to its low-cost funding base. In Q4 2014, total deposits grew by an encouraging 9% year over year to nearly $58 billion. The relatively juicy interest rates the bank pays out for those deposits, plus a recent move to provide free FICO scores to customers, should help add to that pile.

The higher the deposit figure, of course, the more the company can lend into those growing segments.

Taking another route
So although GM's decision is indisputably a loss for Ally Financial, I think before long it will be more than compensated by gains in the other auto lending segments. The American car market is huge, and it has a number of lucrative niches. Losing a favorite partner hurts, but the recovery can be quick if there are plenty of potential new partners to choose from.