While Ally Financial expects the strong used-car market to lose steam over the next two years, there’s no sign of a drop-off yet.
The Detroit-based lender continues to benefit from robust auto sales and moderate credit costs, which are keeping financial returns well above prepandemic levels.
“Where we’re underwriting in prime and in particular at the intersection of used and prime, there’s still a terrific amount of transaction volume,” Chief Financial Officer Jenn LaClair said Thursday during a conference call with analysts.
LaClair estimated that 4 million to 5 million consumers are currently sitting on the sidelines of the auto market simply because they cannot find a vehicle to buy.
“So not only are we expecting this very strong origination volume to continue this year, we expect it in the future,” LaClair said.
Ally reported first-quarter earnings of $627 million, a 20% year-over-year decline due in large part to a $167 million provision for loan losses. One year earlier, the company recorded a $13 million reserve release.
The first-quarter provision “reflects robust origination activity and the anticipated gradual normalization of credit performance,” Ally CEO Jeffrey Brown said on the conference call.
Though Ally’s first-quarter earnings were down year over year, they still represented a big jump over comparable net income in 2020 and 2019. For all of 2022, Ally is projecting a return on tangible common equity in the 16% to 18% range, compared with 12% in 2019.
Ally’s first-quarter results and its 2022 guidance “reflect a generally stable business with core, fundamental growth among improving returns,” John Hecht, an analyst who covers the company for Jefferies, wrote in a research note.
Ally, which has $184.3 billion of assets, has boosted its profile in mortgages and point-of-sale lending in recent years. And last year, it expanded into credit cards with a
Those moves have helped diversify the company’s balance sheet, but at its core Ally remains an auto lender, with car loans accounting for nearly two-thirds of its $175 billion in earning assets.
Last year, Ally recorded record profits of $3.1 billion, powered by used-car sales, which reached an unprecedented 40.9 million units nationally.
As the market normalizes, Ally is predicting that average used-car values will decline 10% to 15% by 2023. Still, conditions remained strong enough in the first quarter for Ally to originate consumer car loans totaling $11.6 billion, up 14% year-over-year. Total consumer originations included $7.6 billion in used-car loans.
Ally’s ongoing retail auto strength stems from a shift in focus to prime borrowers, according to LaClair. She said that super-prime consumers tend to wait to buy their preferred new-car option, even in the wake of the pandemic-era supply-chain disruptions.
LaClair added that even if used-car sales begin to slow — as many observers expect — sales of new cars and loans to dealers should act as what she termed a “natural hedge.”
“I think Ally really wins either way,” LaClair said.
Notwithstanding Ally’s expectation that credit quality will gradually normalize, it remained solid in the first quarter. Retail auto net chargeoffs totaled $113 million, up slightly on a year-over-year basis, but less than half the total from the first quarter of 2020.
Ally expects retail auto net chargeoffs, which amounted to 0.58% of loans in the quarter that ended March 31, to remain below 1% throughout 2022, according to Hecht.
Ally reported mortgage originations of $1.7 billion in the first quarter, in line with its result from the first quarter of 2021, but down 41% on a linked-quarter basis. Point-of-sale loan originations of $442 million and credit-card balances of $1 billion were both up significantly.
Ally reported deposits of $142 billion on March 31, up 3% from the same period in 2021. Core deposits, excluding brokered funding, were up 6% year over year.
