Auto loan charge-offs rose sharply at Ally Financial in the fourth quarter, but executives say that they're well prepared for economic turmoil and further declines in used-car values.
More consumers are struggling to pay their auto loans from Detroit-based Ally, whose retail auto net charge-offs jumped to $347 million last quarter, up from $217 million three months earlier.
Charge-offs surpassed their pre-pandemic levels and are over three times higher than where they were in 2021, when government stimulus, elevated savings and lower inflation put consumers on sounder financial footing, according to quarterly results issued by the company Friday.
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"The ultimate path of the economy over the near term remains fluid, but we feel very good about the reserve and capital position of the company," Brown said on an earnings call.
Investors appeared to like his message, with Ally's stock ripping higher on Friday and jumping nearly 19% to $31.12 per share. The gains helped the stock recover from the battering it has taken since peaking at around $55 per share in 2021; the subsequent fall was driven partly by concerns that the pandemic boom in used autos would be followed by more consumer defaults.
While risks are higher and the quarter "had modest puts and takes," Ally's results "reflected a focused execution in an increasingly difficult market," Jefferies analyst John Hecht wrote in a note to clients.
The loans that Ally made between the third quarter of 2021 and the second quarter of 2022 are experiencing higher losses, executives said. But more recent loans are performing better, thanks to Ally's tighter underwriting standards as well as its higher prices to cover the larger risks.
That more cautious approach has led to a slowing in auto loan originations. The company made $9.2 billion in auto loans to consumers during the fourth quarter, down from $12.3 billion a quarter earlier.
"We pared back fairly considerably in the fourth quarter from where we had been running," Brown said.
Part of the pullback is due to "being ever more deliberate on credit management" and taking a bit less risk. But there's also an element of consumer demand, with fewer wanting to borrow as interest rates keep climbing higher. "You hit a bit of a saturation point with consumers," Brown said.
Higher rates on loans helped Ally outperform market expectations on its net interest income, blunting the impact of its increased deposit costs.
Ally, whose rate on high-yield savings accounts has risen to 3.3%, is continuing to draw in new depositors but
But the interest it received on loans also rose, and its net interest margin of 3.65% was higher than consensus estimates of 3.49%, according to Wolfe Research analyst Bill Carcache. As for the jump in Ally's stock, Carcache said it was partly because the company "addressed many of the key concerns that had been weighing on shares" with a detailed outlook on some critical issues.
One major question facing Ally is how much further used-vehicle prices will drop, following a spike earlier in the pandemic as supply chain challenges vastly hampered new auto manufacturing. Automakers have since ramped up their production a bit, and used auto prices have fallen in recent months.
A steeper-than-expected decline in used-car prices would lower the value of the collateral that Ally repossesses when consumers default on their auto loans, sending charge-off figures higher.
Ally executives have been preparing for a 30% decline in used-auto prices from their peaks. Last year's declines totaled 19%, and executives project some further declines this year within the range it's anticipated.
Morgan Stanley analyst Betsy Graseck asked Ally executives about the impact on charge-offs if prices fall further than they currently expect.
Brown said many industry forecasters anticipate the declines to be more modest, and that the still low auto-manufacturing figures provide "some structural support" to used-car prices as consumers are less able to buy new ones.
Ally executives "always try to take a more conservative view," Brown said, but the chances of a much steeper decline leading to significantly higher charge-offs is "a little bit unlikely."
