Detroit-based Ally Financial expects to finance fewer car loans this year in the face of an uncertain economy.
One of the nation's largest auto lenders, the $196.2 billion-asset Ally has typically focused origination efforts on used cars as well as new-car buyers who fall in the prime credit category. Ally has been able to maintain deal flow, even as it raised prices over the past year. But in the first quarter, Ally shifted focus to super-prime buyers, reducing financing costs for borrowers with the highest credit scores.
Loans to super-prime borrowers have accounted for 40% of originations in recent weeks, Brad Brown, interim chief financial officer, said on Wednesday during a conference call with analysts. Ally hired Goldman Sachs executive Russell Hutchinson to serve as its permanent CFO last month, though Hutchinson won't join the company until July.
At the same time, Ally plans to dial back the pace of automotive lending. The company, which originated $9.5 billion of car loans in the first quarter, is forecasting approximately $40 billion of originations for all of 2023, down from its previous internal target of $43 billion.
"Our outlook is really let's be more conservative in posture to protect the house going forward," CEO Jeffrey Brown said during the Wednesday conference call. "If that means we give up a couple billion dollars of originations, we'll do that."
"The outlook is reasonable amidst increasing auto industry risk," John Hecht, who covers the company for Jefferies, wrote in a research note.
Besides pulling back in auto lending, Ally took other steps that indicated it expected credit quality to soften. Its first-quarter provision for credit losses was $446 million, more than double the amount a year earlier. The year-over-year bump up took into account an increase in net charge-offs as well as "a mass reserve-build to reflect the evolving macro environment," Brad Brown said. It also was the biggest contributor to a 54% decline in net income over the same period to $291 million.
Ally's first-quarter results "reflected a focused execution in an increasingly difficult market," Hecht wrote.
Noninterest expenses rose 13% to $1.3 billion as Ally boosted spending on employee hiring and technology. Brad Brown said he expects spending to level off as 2023 progresses.
In line with its CEO's more defensive stance, Ally lowered its full-year 2023 earnings projection to $3.65 per share, down from $4. The first quarter's $291 million profit amounted to 96 cents per share.
In one bright spot, Ally reported 126,000 net new deposit customers in the first quarter, its highest quarterly growth ever, which drove an $813 million increase in retail deposits. Total deposits of $154 billion were 8% higher year over year and were up 1.1% on a linked-quarter basis.
Of Ally's $138 billion in retail deposits, 91% are insured by the Federal Deposit Insurance Corp.
Outflows of uninsured deposits were elevated the week of March 13,
"Obviously it was an interesting quarter, but we fared well, and I'm proud of how the team responded," said Jeffrey Brown.
Ally's more subdued forecast didn't seem to faze investors. Shares in the company closed on Wednesday up more than 2% at $27.45.
