Canadian Bank Buys Ally’s Auto Loan Division
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UPDATED: Oct 25, 2012
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The Royal Bank of Canada (RBC), the country’s financial industry giant, intends to double its auto loan lending by purchasing the auto loan division of Ally for $4.1 billion.
While mortgages account for the majority of RBC’s revenue, auto loan lending is considered to be relatively low-risk when compared to the mortgage lending industry..
“It’s a stable business with a low loan-loss profile, and that’s always what you’re looking for in an acquisition. Canadians pay off their car loans,” said Dave McKay, RBC’s group head of personal and commercial banking, in a Reuters interview.
The RBC expects the newly purchased division to generate about $121 million within the first 12 months of being fully absorbed into the Canadian bank.
Despite being mostly owned by the U.S. Treasury, Ally intended to sell its international operations—such as its auto loan division—in order to increase the repayment of bailouts from the federal government.
Earlier in October, Ally sold its Mexican insurance division to ACE Ltd for $865 million.
In spite of these two sales, Ally still has a long way to go considering it received $17 billion in bailouts from the federal government during the devastating financial crisis.
It has only repaid $5.8 billion to date.
Once it finishes selling off its international operations, Ally believes it will be able to repay an additional third of its remaining debt.
While Canadian banks still remain solvent, they struggle to generate sizable profits in their mortgage divisions—hence the desire to diversify into an auto lending division.
Seeing little sign of a reversal, Canadian banks have decided to look to other types of financing in order to generate more profit.
“They’re going to have to find growth somewhere and it’s not going to come through the mortgage channel. I think it’s going to be outside of that in some of these non-traditional channels,” said Tom Lewandowski, an analyst at Edward Jones.