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ALLY Stock Plunges as CFO Warns of Rising Delinquencies in Auto Loans
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Shares of Ally Financial Inc. (ALLY - Free Report) lost 17.6% in Tuesday’s trading, touching its lowest level since January, after the company warned of “intensifying credit challenges” in the current quarter.
ALLY’s CFO, Russ Hutchinson, said at the Barclays Global Financial Services Conference in New York, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.”
Ally Financial’s Key Problem Area
Retail auto loans have become a significant area of concern for ALLY.
Since borrowers continue to struggle with inflation issues and the high interest rate environment, the demand for car loans has come down. As the cost of living increases, people find it difficult to repay their loans.
Thus, Ally Financial is witnessing an increase in delinquencies in its retail auto-loan business.
In July and August, ALLY’s delinquencies rose about 20 basis points above what was expected. Also, its net charge-offs (debts that are not likely to be recovered) in the retail auto business were 10 basis points higher than expectations in these two months.
Hutchinson said that the company’s net charge-off rate will likely increase further in the coming months (especially in the 61-plus-day delinquency bucket) because of the large number of borrowers who are struggling amid the weakening economic outlook.
Sale of ALLY’s Lending Business to Synchrony
To address the credit issue, Ally Financial sold its point-of-sale (POS) financing business — Ally Lending (which included $2.2 billion of loan receivables as of Dec. 31, 2023) — to Synchrony (SYF - Free Report) in March 2024.
The deal was announced this January. At that time, ALLY expected the divestiture to bolster its Common Equity Tier 1 (CET1) ratio by almost 15 basis points at closing. Also, the deal is projected to be modestly accretive to tangible book value and earnings per share this year.
Under the terms of the transaction, Ally Financial’s relationships with almost 2,500 merchant locations and support to more than 450,000 active borrowers in home improvement services and healthcare got transferred to SYF.
The move reflected ALLY's commitment to optimizing its capital allocation and prioritizing resources toward high-growth areas. For Ally Financial, the transaction was part of a broader initiative to invest resources in growing scale businesses and strengthen relationships with dealer customers and consumers.
ALLY has been undertaking steps to bolster profitability amid a challenging operating backdrop. In 2023, the company trimmed its headcount, leading to $80 million of annualized expense savings. Further, the deconsolidation of $1.7 billion worth of seasoned retail auto loans resulted in 9 bps of CET1 benefit.
ALLY’s Price Performance & Zacks Rank
In the past six months, ALLY shares have lost 14.3% (the drop is because of yesterday’s slump) against the industry’s growth of 3.4%.
Image Source: Zacks Investment Research
However, the company is well poised for top-line growth given the high interest-rate environment and its efforts to diversify revenues. Ally Financial expanded into the mortgage business, which supports its earnings. Also, the company has been making efforts to enhance digital offerings and introduce new products to boost profitability. Its wealth management and online brokerage initiatives related to credit card offerings remain impressive.
Another consumer loan provider with a favorable Zacks Rank is EZCORP, Inc. (EZPW - Free Report) . EZPW also sports a Zacks Rank of 1 at present. Over the past 60 days, the Zacks Consensus Estimate for the company’s current fiscal-year earnings has been revised 1.8% upward. In the past six months, EZCORP shares have gained 4.1%.
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ALLY Stock Plunges as CFO Warns of Rising Delinquencies in Auto Loans
Shares of Ally Financial Inc. (ALLY - Free Report) lost 17.6% in Tuesday’s trading, touching its lowest level since January, after the company warned of “intensifying credit challenges” in the current quarter.
ALLY’s CFO, Russ Hutchinson, said at the Barclays Global Financial Services Conference in New York, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.”
Ally Financial’s Key Problem Area
Retail auto loans have become a significant area of concern for ALLY.
Since borrowers continue to struggle with inflation issues and the high interest rate environment, the demand for car loans has come down. As the cost of living increases, people find it difficult to repay their loans.
Thus, Ally Financial is witnessing an increase in delinquencies in its retail auto-loan business.
In July and August, ALLY’s delinquencies rose about 20 basis points above what was expected. Also, its net charge-offs (debts that are not likely to be recovered) in the retail auto business were 10 basis points higher than expectations in these two months.
Hutchinson said that the company’s net charge-off rate will likely increase further in the coming months (especially in the 61-plus-day delinquency bucket) because of the large number of borrowers who are struggling amid the weakening economic outlook.
Sale of ALLY’s Lending Business to Synchrony
To address the credit issue, Ally Financial sold its point-of-sale (POS) financing business — Ally Lending (which included $2.2 billion of loan receivables as of Dec. 31, 2023) — to Synchrony (SYF - Free Report) in March 2024.
The deal was announced this January. At that time, ALLY expected the divestiture to bolster its Common Equity Tier 1 (CET1) ratio by almost 15 basis points at closing. Also, the deal is projected to be modestly accretive to tangible book value and earnings per share this year.
Under the terms of the transaction, Ally Financial’s relationships with almost 2,500 merchant locations and support to more than 450,000 active borrowers in home improvement services and healthcare got transferred to SYF.
The move reflected ALLY's commitment to optimizing its capital allocation and prioritizing resources toward high-growth areas. For Ally Financial, the transaction was part of a broader initiative to invest resources in growing scale businesses and strengthen relationships with dealer customers and consumers.
ALLY has been undertaking steps to bolster profitability amid a challenging operating backdrop. In 2023, the company trimmed its headcount, leading to $80 million of annualized expense savings. Further, the deconsolidation of $1.7 billion worth of seasoned retail auto loans resulted in 9 bps of CET1 benefit.
ALLY’s Price Performance & Zacks Rank
In the past six months, ALLY shares have lost 14.3% (the drop is because of yesterday’s slump) against the industry’s growth of 3.4%.
Image Source: Zacks Investment Research
However, the company is well poised for top-line growth given the high interest-rate environment and its efforts to diversify revenues. Ally Financial expanded into the mortgage business, which supports its earnings. Also, the company has been making efforts to enhance digital offerings and introduce new products to boost profitability. Its wealth management and online brokerage initiatives related to credit card offerings remain impressive.
Currently, Ally Financial sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Another consumer loan provider with a favorable Zacks Rank is EZCORP, Inc. (EZPW - Free Report) . EZPW also sports a Zacks Rank of 1 at present. Over the past 60 days, the Zacks Consensus Estimate for the company’s current fiscal-year earnings has been revised 1.8% upward. In the past six months, EZCORP shares have gained 4.1%.