As the United States Treasury Department water down its holdings in Ally Financial Inc. through an initial public offering, the company would soon have more freedom take on more risk. According to an IPO prospectus issued in March, the Treasury’s exit will allow Ally to make more auto loans to borrowers having lower credit scores from its commercial bank unit, according to a prospectus issued last month.
Ally is set to price its shares on April 9, and could raise up to $2.7 billion with the IPO. Mark Palmer, an analyst at BTIG LLC, said that once the IPO is completed and the US government has been repaid, Ally will have more room to grow Ally Bank and improve its profitability.
Ally counted 16,000 US car dealerships as customers at end of 2013, according to the filing. Ally securitizes dealer loans for sale to institutional investors. As of year-end, Ally Bank had 1.5 million accounts and $52.9 billion of deposits.
The government currently requires financing of subprime loans through Ally Financial instead of Ally Bank, thereby hiking the amount of higher-cost unsecured debt. Ally said in the filing, that over time the requirements will normalize in relation to other banks and will favorably impact their financial performance.
The company also said that subprime loans have surged to account for 11 percent of Ally’s portfolio. Jesse Rosenthal, an analyst at CreditSights Inc., remarked increasing the share of subprime could be a credit risk, noting Ally has been “reaching down the credit spectrum on underwriting.”
He said that this is reflective of the strength of the auto asset class, it is still a risk. Ally chief executive Michael Carpenter said the lender can emerge from the bailout by the end of 2014.