NEW YORK -

Fitch Ratings recently weighed in on the future prospects of both Ally Financial and General Motors Financial now that one company has finalized a major leadership change and the other is taking on more leasing business as the captive for the parent automaker.

Analysts explained GM’s higher emphasis on offering its customers lease options through GM Financial poses another challenge for Ally and could pressure the finance company to weigh other potentially higher risk avenues to support its growth, such as what new chief executive officer Jeffrey Brown already discussed.

That said, Fitch added that the loss of the GM contract will reduce Ally’s exposure to residual value risk, which analysts views positively given the current environment that is characterized by elevated used-vehicle pricing and “intense” competition.

Fitch pointed out that ratings assigned to Ally (BB+, outlook stable) and GM Financial ('BB+', outlook positive) are unaffected by the development at this time, “as Fitch had anticipated this possibility for some time, given GM's stated objective to grow GMF,” analysts said.

“That said, longer-term rating implications will be influenced by Ally’s response to the forgone business,” they added.

Ally confirmed last week that GM would offer subvented leases on several of its popular brands exclusively through GM Financial. Fitch acknowledged this development adds to a “number of headwinds” facing Ally and the auto finance industry more broadly, including normalizing credit performance, intense competition and pricing pressure, as well as elevated regulatory and litigation risk.

Anlaysts recapped that Ally’s total lease origination volume for the three brands affected — GMC, Buick and Cadillac — accounted for 12.7 percent, or $5.2 billion of Ally’s $41 billion in total originations in 2014. Fitch believes Ally's remaining GM subvented products, which include leasing for Chevrolet vehicles and loans on GM vehicles, remain at risk.

Combined, these remaining products accounted for $8.1 billion or 20 percent of Ally's total 2014 originations, according to Fitch’s calculations.

“Despite the loss of GM subvented lease volume, Ally remains confident that it will achieve origination volume in the high $30 billion range in 2015,” analysts said. “Fitch believes the target is potentially achievable but reaching it will pose challenges and may lead to growth in potentially higher risk areas to meet shareholder expectations.”

Fitch touched on how the loss of the GM lease contracts comes as Michael Carpenter, Ally's CEO since 2009 and the chief architect of the company’s turnaround, stepped down as the board turned to Brown to assume the helm as the new CEO on Feb. 2. Brown served in several leadership positions at Ally since joining the company several years ago from Bank of America, where he last served as the corporate treasurer.

“Fitch recognizes that Ally has successfully overcome multiple significant challenges over the last few years as the company transitioned from a captive finance company to an independent diversified auto finance company,” analysts said. “GM’s internalizing of leasing presents yet another challenge for the company and places a greater emphasis on Ally's growth channel, which the company defines as originations from non-GM and non-Chrysler dealers.”

The industry observer indicated originations within this channel have grown at a 61 percent compound annual growth rate since 2010 and represented $8.3 billion in 2014 (or 20 percent of total 2014 originations).

“Fitch continues to believe that Ally remains well positioned as a market leader in the growing U.S. automotive finance market, an industry that should provide ample opportunities for the company to prudently grow its core auto finance business in the future,” analysts said.

Fitch indicated ratings assigned to GM Financial and its affiliates' are equalized with the GM parent. Fitch considers GM Financial to be a “core” subsidiary of GM based on actual and potential support provided to the finance company from GM, the increasing percentage of the finance company’s earning assets related to GM and the strong financial and operational linkages between the companies.

“The rationale for GM’s lease internalization in Fitch's view is largely driven by the strategy to sustain strong unit sales and earn an attractive net lease yield,” analysts said. “GM specifically noted that it believes the company could better control its options for retaining customers at the end of leases through its own financing arm.

“Fitch agrees that leasing is an important strategy for auto firms to build brand loyalty as lessees are more likely to lease or buy with the same manufacturer,” they continued. “However, leasing does introduce residual value risk, which requires careful residual value and depreciation policy setting, particularly in the current market where used car values remain high but are expected to moderate.”

Fitch emphasized that it will monitor GM Financial’s growth and expansion in leasing, paying particular attention to underwriting standards, residual value management, profitability, funding and leverage.

“GM’s strategy of increasing its dependence on GM Financial is in line with other global auto manufacturers,” analyst said. “However, a larger GM Financial increases the likelihood that GM could need to provide extraordinary financial assistance in the case of a liquidity event at the subsidiary. Such an event would have the potential to place downward rating pressure on GM.”