Ally Financial has rapidly expanded its electric vehicle leasing business after receiving a 50 percent residual value guarantee from an unnamed automaker in the first quarter.
Ally, one of the nation's largest auto lenders, reported July 17 that it financed $1 billion in loans and leases for new electric vehicles and plug-in hybrids in the second quarter, more than double the $347 million a year earlier and up 39 percent from the first quarter.
It wasn’t loans that drove the growth of EVs and hybrids, but leasing. Ally said it issued $639 million in EV and hybrid leases in the second quarter, more than triple the $174 million it had written a year earlier. According to its second-quarter investor presentation, EV and hybrid loans more than doubled from $173 million to $366 million in the same time frame.
Electric vehicles made up 83 percent of Ally's $639 million in second-quarter leases. They were not in the portfolio a year earlier; Ally leased only plug-in hybrids.
“This volume increase is another example of how our automotive business is well positioned for the changing auto market,” Ally Chief Financial Officer Russ Hutchinson said on a July 17 earnings call. “We are pleased with the risk-adjusted returns we are getting in the channel, particularly the residual value protection.”
Hutchinson said Ally reached a residual value guarantee with the automaker in March. Ally did not name the automaker to Automotive News.
“Virtually all of our battery electric vehicle leases come with residual warranties from the OEM,” Hutchinson said on a conference call to discuss financial results.
In a government report for the first quarter, Ally said the company had entered into a deal with the automaker during the period and indicated that the manufacturer would guarantee 50 percent of the residual value of the vehicle contract. The report also did not identify the name of the automaker or the type of transmission.
An earlier deal with an automaker (it's unclear whether it was the same company or also for electric vehicles) guaranteed Ally 15 percent of the list price.
The previous deal did not generate the same amount of leasing as the new agreement.
Ally had $43 million in leased vehicles with 15 percent coverage in the first quarter of 2023, $30 million in leased vehicles with the same coverage in the second quarter of the same year, and $12 million in leased vehicles at the end of 2023.
In the first quarter of 2024, Ellie had $272 million of leased vehicles with one of the two guarantees, nearly six times what it was a year earlier, and all but $8 million of that was tied up in a 50 percent-of-residual-value deposit.
In the second quarter, Ally nearly tripled that amount, bringing its portfolio of leased vehicles to $776 million with any of the guarantees, with all but $3 million guaranteed at 50 percent of residual value.
Leasing contracts divide the cost of the vehicle and the lender's profit margin into a series of monthly payments and a lump sum of residual value. At the end of the lease term (usually a three-year term), the consumer can purchase the vehicle at the residual value or return it to the lender, who then registers the used vehicle on its books.
Ideally, the lender could sell the car and recoup the entire residual value — or even more, as was the case during the inventory shortage — and break even or make a profit. But if the residual value is too high, the lender could lose money on the deal.
This excess residual value could be intentional—for example, the automaker may have inflated the residual value so that the lessee would receive lower monthly payments—or unintentional, from failing to predict the used-car market at the end of the lease. Recently, aggressive price cuts by automakers have caused used EV prices to fall—potentially a problem for any lender that was constructing a lease based on old EV values.
Residual value guarantees provide some peace of mind by setting a lower limit on potential losses. Hutchinson said on the earnings call that Ally’s EV guarantees have given it “significant protection against declines in value.”
The increase in guaranteed leases from $12 million to $776 million over two quarters suggests Ally bought and leased thousands of electric vehicles from an unnamed manufacturer during the first half of the year.
Among the automakers that Kelley Blue Book said had strong EV sales or models with lower EV sales but higher prices in the first half of 2024 were Ford, General Motors, BMW, Mercedes, Toyota, Kia, Nissan and Lucid — all of which said they don’t have a similar program with Ally. Volkswagen, Audi, Volvo and Polestar didn’t respond to emailed questions left in mid-August.
A Hyundai spokesperson said he had no corporate knowledge of Ally's partnership with Hyundai or Genesis. Rivian's most recent quarterly government filing described the company as offering a warranty only on an unspecified number of leased vehicles to Chase Auto, its white-label financing partner.
Tesla, the electric vehicle market leader, did not respond to an emailed request in mid-August. But it appears to have significantly increased its residual warranties during the first half of the year.
In a government filing for the second quarter, Tesla reported a maximum exposure of $807 million in residual value guarantees to “commercial banking partners” at the end of June — up from $166 million at the end of 2023. The company said its liability applies if lenders “are unable to sell the vehicle at or above the contractual residual value of the vehicle at the end of the lease term.” But it called the liability under those guarantees “immaterial” at both quarter and year end.
The bank makes the same profit on leasing electric vehicles as it does on leasing internal combustion engines, Alley said, because of a $7,500 tax credit available to those who buy electric vehicles for commercial use. The bank reduces consumer lease payments by $7,500, making leasing electric vehicles cheaper than gas-powered models, but it also gets a $7,500 tax credit, which reduces its own taxes, according to an investor presentation.
Ally explained the concept using a hypothetical 36-month lease on an electric car signed at a time when the bank had a 21 percent tax rate. In this scenario, Ally subsidizes the lease by $2,500 each year for about a three-year lease, but gets a $6,500 tax credit in the first year, then a $500 tax credit in the second year and again in the third year, and comes out on top.
Hutchinson noted that Ally's revenue from leasing electric vehicles is less than its revenue from leasing internal combustion vehicles, but the amount is not significant.
“High volumes of EV leasing resulted in over $90 million in EV tax credits over the period, resulting in a negative tax rate for [second] “We expect the momentum we're seeing in EV leasing to result in a negative tax rate for the year,” Hutchinson said on an earnings call.