Ally’s charge-offs rise but execs still see ‘very attractive’ auto market

Ally Financial is charging off more of its auto loans, but executives said it’s well prepared for a rocky economy and that customers’ balance sheets remain solid.

Net charge-offs on the Detroit company’s retail auto business doubled from last quarter and reached $217 million, as the unusually healthy credit environment throughout the pandemic has almost returned to normal.

While charge-offs remained under the pre-pandemic levels of $253 million, the company told analysts to expect them to migrate above 2019 levels. Still, CEO Jeffrey Brown noted they’re “adequately protected” by high loan-loss reserves and their increased pricing should also help soften any potential blows.

“At this stage, indicators remain solid, and we’ll remain nimble and react accordingly as the market evolves,” Brown told analysts Wednesday, adding that the company still sees a “strong and well-positioned consumer” who can continue paying back loans .

Ally’s stock fell more than 8% to $26.42 per share after its earnings report, indicating the market “seems more attempted” than Ally about the credit outlook, according to Robert Wildhack, an analyst at Autonomous Research.

Ally is continuing to lean into the auto sector, originating $12.3 billion in consumer auto loans during the third quarter, down from $13.3 billion a quarter earlier and flat compared with last year.

During the call, another analyst asked Ally “why not slow the originations a bit more” and hunker down given increased worries over the US economic outlook.

Other banks such as Capital One Financial and PNC Financial have pulled back from the sector, citing aggressive pricing from credit unions and worries that the sector may slow after seeing a boom during the pandemic.

Brown said the pullback “makes sense” for lenders that are more heavily concentrated in super-prime consumers, those with excellent credit scores and where competition is heavy. On the other end, the spike in used auto prices has limited subprime borrowers’ demand.

But he said Ally is more focused on the prime consumer right in the middle, and the sector remains “very attractive” with “robust” returns.

“We really like the loans we’re putting on the books today and think they’re going to prove to be very profitable over time,” Brown said.

Ally’s retail auto net charge-offs hit an annualized rate of 1.05% during the quarter, still below the 1.38% it recorded in the third quarter of 2019. Executives expect losses to drift toward 1.6%, but they also noted that they’ve remained “disciplined” with underwriting and that they’ve raised their pricing to adjust for risk and compensate for higher losses.

“We certainly recognize the tightening environment, but consumer credit underwriting is a core capability of our company, and we believe we are generating some of the most attractive, risk-adjusted loans in the history of Ally,” Brown said.

The company also bumped up its loan-loss reserves, partly due to its continued loan growth along with the increasing likelihood of a recession. Provisions for loan losses rose to $438 million during the quarter, up from just $76 million a year earlier, helping tamp down Ally’s quarterly net income.

Overall, Ally’s net income attributable to common shareholders slipped to $272 million during the quarter, down from $683 million a year earlier.

The company announced a day earlier that Jenn LaClair, who has been Ally’s chief financial officer since late 2017, had left the post but is staying on as senior operating adviser to help with a transition. Bradley Brown, the company’s longtime corporate treasurer, is stepping in as interim chief financial officer.

LaClair joined the start of the call and said the company will work to “facilitate a seamless transition” and highlighted milestones Ally has hit along the way.

One such milestone — growing its deposits and relying less on more expensive funding sources — continued during the third quarter. Though the industry is starting to see its deposit levels decline, Ally had roughly $145.8 billion in deposits at the end of the quarter, up from $139.4 billion a year earlier.

Brown, the company’s CEO, said LaClair has been “instrumental in our company’s evolution.”

“I know Jenn is excited to pursue her next chapter of opportunities, and candidly, that’s hard to do while serving as a CFO,” he said. “So we mutually determined now is the best time for a change and in advance of an even more fluid macro environment.”

He also said while CFO transitions are “never easy,” Ally has a “strong bench in place that will work closely with me while we launch a search” for LaClair’s permanent replacement.


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