UPDATE: This story includes information from Ally’s earnings call and commentary from analysts.
Ally Financial’s new management is confident that its recent problems, which stem from some borrowers being unable to repay their auto loans, will get better. They just can’t predict when.
The company’s stock, already hammered after its September
Rhodes, who joined in late April after longtime CEO Jeffrey Brown’s departure, told analysts to expect “earnings challenges over the next few quarters,” as consumers continue struggling with inflation.
Rising stress among auto borrowers prompted Ally to write off some 2.24% of retail car loans during the quarter, up from 1.85% a year earlier. It bumped up its estimates for charge-offs over the rest of the year, and though Ally expects improvement at some point, executives were wary about projecting when that might happen.
“I want to acknowledge the next few quarters will be choppy,” Rhodes said on the company’s third-quarter earnings call. “I remain confident in our franchise and our ability to deliver compelling returns.”
Rhodes pointed to strengths outside of Ally’s bread-and-butter consumer auto lending business. Its loans to auto dealers, for example, rose 13% from last year to $23.8 billion, as dealers sought to expand their inventories. The company’s corporate finance group, which lends to sectors beyond the automotive industry, saw its pre-tax income rise to $95 million, up from $84 million a year earlier.
Ally’s lending to auto dealers and corporate clients, combined with its growing digital bank customer base, are two factors that Rhodes said “positions us to continue winning in the marketplace.”
Analysts weren’t too downbeat about Ally’s earnings. The company’s results “met lowered expectations,” RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients, noting that Ally executives had flagged rising charge-offs back in September.
Citigroup analyst Keith Horowitz told clients that he was strongly reiterating his “buy” rating on Ally’s stock. While the company will no doubt face a challenging year-end, behind the curtain there are signs of “incremental improvement” in its credit trends, he wrote.
Those signs revolve around when exactly a borrower bought their car. The bigger problems for Ally are happening with loans made in 2022, when a pandemic-driven supply crunch curtailed the supply of new cars. The new-car shortage made used ones more valuable, driving their prices to record levels that
Consumers bought those more-expensive cars just as interest rates rose sharply, pandemic-era savings dwindled and inflation on goods beyond cars rose at the fastest pace in decades.
Some lenders pulled back from auto lending as conditions got trickier, but Ally
Loans made in 2022 are now facing bigger challenges and haven’t met the more “optimistic” expectations Ally had maintained earlier, said Chief Financial Officer Russell Hutchinson, who joined the company in July 2023.
But loans made last year are showing better trends, he added, pointing to a comparison that Ally presented to investors. Twenty-one months into a loan, some 4.34% of the loans from 2022 ran into trouble, as the borrowers were late on their payments. The comparable figure dropped to 4.03% for loans made in 2023.
This year’s loans are also showing some improvement. Nine months into the year, 1.38% of the 2024 loans had delinquencies of at least 30 days compared with 1.62% of loans in both 2022 and 2023.
Horowitz, the Citi analyst, wrote that the upcoming pressures for Ally miss the “forest for the trees,” since the comparisons of recent loan vintages suggest Ally has turned the corner.
Ally’s CFO didn’t go that far, telling analysts of “encouraging signs” but also saying the auto lender would not offer “specific timing on when we expect credit to crest.”
Despite the higher write-offs, the Detroit-based company saw its net income rise to $357 million during the quarter, up 20% from $296 million a year ago. Diluted earnings per share were $1.06, significantly outpacing analysts’ expectations of 42 cents, according to S&P Capital IQ data.
Interest-related income fell slightly, as Ally made fewer loans, yet had to pay more interest to its depositors.
Other revenues at Ally helped power the company’s earnings, rising to $615 million, up 41% from $435 million a year earlier. An increase in the equity securities Ally holds accounted for a large chunk of other revenues, as did increased premiums in the firm’s insurance business and fee revenues from certain partnerships.
Ally has
Rhodes pointed to steps that Ally has taken to seek out less-risky borrowers and charge more to compensate for higher risks. Ally is “confident the curtailment actions we’ve taken will drive losses lower over time,” he said.
Ally had long targeted more middle-of-the-road consumers for its loans, but it’s increasingly shifted toward customers with higher credit scores. The average FICO score of its auto borrowers rose to 710 during the third quarter, up from 704 a year earlier and 688 two years before.
The company’s auto loan approvals have dipped sharply from 2022, when the pandemic-fueled boom in the auto market
And the company has been charging higher interest rates to make up for potential losses if borrowers can’t repay their loans. The yields on loans Ally made last quarter averaged 10.5%, up sharply from 8.7% two years ago.
In a presentation to investors, Ally flagged other steps it’s taken to reduce risk. It has upped its requirements for proof of customers’ employment and income, and reduced approvals both for borrowers with limited credit histories and those who would need to make higher monthly payments.
During the third quarter, Ally set aside more money to cover potential loan losses. Its provisions for credit losses rose to $645 million, up from $508 million a year earlier.
Net financing revenues dropped to $1.48 billion during the quarter, down 3% from $1.53 billion in the same period last year, as its interest revenues stayed flat and interest expenses rose.
Ally, whose high-yield savings platform added customers for the 62nd quarter in a row, said the interest it paid on deposits rose to $1.62 billion, up from about $1.56 billion a year earlier.