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Ally Financial Inc. (ALLY - Free Report) is raising credit loss provisions in its auto loan business as economic uncertainty rises. This Zacks Rank #5 (Strong Sell) is expected to see double digit earnings decline this year and next.
Ally Financial is a digital financial services company with commercial and corporate customers. It operates a digital bank, Ally Bank, which offers mortgage lending, personal lending, deposits and other banking products, as well as auto finance and insurance operations.
Ally also operates a consumer credit card business, a securities brokerage and investment advisory service and a corporate finance business for equity sponsors and middle-market companies.
A Big Miss in the Third Quarter
On Oct 19, 2022, Ally Financial reported its third quarter results and missed big on the Zacks Consensus Estimate. It missed by $0.61, with earnings at $1.12 versus the consensus of $1.73. It was the second earnings miss in a row.
Net income was $272 million compared to $683 million a year ago as higher net financing revenue was offset by higher provision for credit losses, higher noninterest expenses and lower other revenue.
The company's mortgage business was hit by rising mortgage rates which cooled the housing market.
"Financial results were partially depressed this quarter as a result of an impairment on a nonmarketable equity investment related to our mortgage business, impacting $0.33 of EPS, and higher provisions as a result of loan growth in auto finance and a larger coverage build to ensure the company remains protected as recessionary conditions feel more likely to occur in the coming months," said Jeffrey J. Brown, CEO.
Ally's provision for credit losses increased $362 million year-over-year to $438 million, due to credit losses which are normalizing in-line with expectations and CECL reserve build attributable to robust retail auto origination volume.
Most of the build came in autos where the provision for credit losses jumped $275 million year-over-year to $328 million. The retail auto net charge-off rate was 1.05%, up 78 basis points year-over-year.
Analysts Slash Full Year Earnings Estimates
With the big earnings miss and the build of provision for credit losses, the analysts are bearish on the full year and 2023.
8 estimates have been cut for 2022 in the last month, pushing the Zacks Consensus Estimate down to $6.05 from $7.19. That's an earnings decline of 29.7% compared to 2021 when Ally made $8.61.
They remain bearish on next year too. The 2023 Zacks Consensus Estimate has fallen to $4.17 from $6.21 in the last 30 days after 9 estimates were slashed during that time.
That's another 31% earnings decline.
Image Source: Zacks Investment Research
Shares are Cheap
Shares of Ally Financial have taken a dive in 2022. They're down 38% year-to-date, even with the recent market bounce off the better-than-expected October CPI number.
They're cheap, with a forward P/E of just 4.9 and a PEG ratio of only 0.15. A PEG under 1.0 usually indicates there is both growth and value. It's a rare combination.
Ally is also shareholder friendly. In the third quarter it did $415 million in share repurchases. Ally also pays a dividend, currently yielding 4.1%.
But with the macro environment still uncertain heading into 2023, investors might want to wait on the sidelines the next few months to see if earnings estimates turn around.
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Bear of the Day: Ally Financial (ALLY)
Ally Financial Inc. (ALLY - Free Report) is raising credit loss provisions in its auto loan business as economic uncertainty rises. This Zacks Rank #5 (Strong Sell) is expected to see double digit earnings decline this year and next.
Ally Financial is a digital financial services company with commercial and corporate customers. It operates a digital bank, Ally Bank, which offers mortgage lending, personal lending, deposits and other banking products, as well as auto finance and insurance operations.
Ally also operates a consumer credit card business, a securities brokerage and investment advisory service and a corporate finance business for equity sponsors and middle-market companies.
A Big Miss in the Third Quarter
On Oct 19, 2022, Ally Financial reported its third quarter results and missed big on the Zacks Consensus Estimate. It missed by $0.61, with earnings at $1.12 versus the consensus of $1.73. It was the second earnings miss in a row.
Net income was $272 million compared to $683 million a year ago as higher net financing revenue was offset by higher provision for credit losses, higher noninterest expenses and lower other revenue.
The company's mortgage business was hit by rising mortgage rates which cooled the housing market.
"Financial results were partially depressed this quarter as a result of an impairment on a nonmarketable equity investment related to our mortgage business, impacting $0.33 of EPS, and higher provisions as a result of loan growth in auto finance and a larger coverage build to ensure the company remains protected as recessionary conditions feel more likely to occur in the coming months," said Jeffrey J. Brown, CEO.
Ally's provision for credit losses increased $362 million year-over-year to $438 million, due to credit losses which are normalizing in-line with expectations and CECL reserve build attributable to robust retail auto origination volume.
Most of the build came in autos where the provision for credit losses jumped $275 million year-over-year to $328 million. The retail auto net charge-off rate was 1.05%, up 78 basis points year-over-year.
Analysts Slash Full Year Earnings Estimates
With the big earnings miss and the build of provision for credit losses, the analysts are bearish on the full year and 2023.
8 estimates have been cut for 2022 in the last month, pushing the Zacks Consensus Estimate down to $6.05 from $7.19. That's an earnings decline of 29.7% compared to 2021 when Ally made $8.61.
They remain bearish on next year too. The 2023 Zacks Consensus Estimate has fallen to $4.17 from $6.21 in the last 30 days after 9 estimates were slashed during that time.
That's another 31% earnings decline.
Image Source: Zacks Investment Research
Shares are Cheap
Shares of Ally Financial have taken a dive in 2022. They're down 38% year-to-date, even with the recent market bounce off the better-than-expected October CPI number.
They're cheap, with a forward P/E of just 4.9 and a PEG ratio of only 0.15. A PEG under 1.0 usually indicates there is both growth and value. It's a rare combination.
Ally is also shareholder friendly. In the third quarter it did $415 million in share repurchases. Ally also pays a dividend, currently yielding 4.1%.
But with the macro environment still uncertain heading into 2023, investors might want to wait on the sidelines the next few months to see if earnings estimates turn around.