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UPDATE 2-Ally Financial quarterly profit hurt by settlement charge

Feb 6 (Reuters) - Ally Financial Inc, the auto lender owned in part by the U.S. government, posted a lower fourth-quarter profit, hurt by a $98 million charge related to a settlement with federal regulators.

The company's core auto lending business slowed in the fourth quarter. New loans totaled $8.2 billion, down 8 percent from the same period in 2012 due to the expiration of an agreement to be the preferred lender of Chrysler.

Ally's executives have been trying to turn around the company after it required $17.2 billion in government bailouts during the 2007-2009 financial crisis. Since then, Ally sold nearly all of its international operations, exited the business of making and servicing home loans and reduced its cost of funds by increasing deposits and redeeming expensive legacy debt.

"A lot of it has been a slog," chief executive Michael Carpenter said on a Thursday conference call with analysts, adding that the company was "very pleased to have all of that in the rear-view mirror."

The Detroit-based company, once the auto lending arm of General Motors Co, said net earnings fell to $104 million in the fourth quarter, from $1.44 billion a year earlier. Last year's results got a boost from an $856 million tax benefit.

Going forward, management's approach will move from defense to offense, or from "cleaning up the sins of the past" to profitability, Carpenter said. Ally hopes to be able to repay the government the $1.9 billion it still owes by the end of 2014.

In November, Ally raised $1.3 billion in a sale of unlisted shares and paid $5.9 billion for certain preferred shares held by the U.S. Treasury and other rights, a step that will save it over $530 million in annual dividends. In January, the U.S. Treasury announced plans to sell around 40 percent of its holdings of Ally stock, reducing its stake to around 37 percent.

Hedge fund Third Point, led by Daniel Loeb, acquired around 9.5 percent of Ally's common shares in the past few months. Loeb called the company in a recent shareholder letter "a highly successful, nearly completed restructuring that remains undervalued, with an explosive earnings story."

HIGHER STANDARD

Nevertheless, challenges remain for the lender. Ally had agreed to pay $98 million in December to settle allegations by regulators that it discriminated in auto lending against black, Hispanic and Asian/Pacific Islander borrowers.

Carpenter said on Thursday's conference call that Ally is held to a higher regulatory standard than its rivals given its government ownership.

Excluding the settlement charge, pre-tax income in Ally's automotive finance business declined 18 percent to $305 million. Executives called the current competitive environment challenging and said that they have let some business go due to rivals' aggressive pricing among certain consumers.

The amount of money Ally set aside for bad loans also increased, to $140 million in the fourth quarter, up over 50 percent from the same period a year earlier. Executives said that older loans were entering their peak loss period and that provision expenses would increase 10 to 20 percent from current levels.