Ally Financial is pointing to the horizon, where the pressure on profitability is showing signs of easing up.
The Detroit-based auto lender is meeting its expectations on its path to stability after rapidly rising rates rocked its business. Ally's net interest margin, a measurement of profitability based on how much it makes on interest compared to what it pays depositors, is getting relief as more of its book is made up of higher-yielding loans and the need to keep consumer cash parked at the bank loosens up.
The bank reeled in $266 million in profit the second quarter, a decrease from $301 million in the second quarter of last year as the bank's stronger yield on loans was outweighed by the price to fund them, along with an increase in reserves in case its debt went bad. Net financing revenue was $1.5 billion, down $78 million from the same period last year.
Although Ally isn't out of the woods on funding costs, its second-quarter net interest margin of 3.27% was at its highest point in a year. Chief Financial Officer Russ Hutchinson said in an interview that the bank is seeing benefits from repricing deposits early in the second quarter.
"I think we're pretty rare in the banking universe, in that, not only do we have NIM expansion in the quarter, but we have NIM expansion supported by both sides of our balance sheet," Hutchinson said. "Both our yields on our assets are moving up, and our cost of funds, predominantly our deposits, is coming down."
The CFO added that the NIM outlook, about 3.3% for the full year, isn't dependent on whether the Federal Reserve cuts rates, due to the natural rollover of fixed-rate loans.
Jefferies analyst John Hecht wrote in a note that Ally's second quarter was "fine," and largely in line with expectations.
"There were some puts and takes, but the positive momentum in pricing supports the main thesis of NIM expansion," Hecht said.
Ally's stock was down 2.3% Wednesday afternoon, at $43.43 per share.
The Detroit-based company is exploring ways to make more consumer auto loans without running afoul of stricter capital standards that are expected from the Federal Reserve. Possible approaches include more securitizations and the use of credit risk transfers.
Provision for credit losses increased $30 million year over year to $457 million, but credit was still a relatively benign story at Ally, especially as auto loans from 2022 mature.
The company's net charge-off rate, at 1.81%, marked the lowest it's been since the second quarter of last year. Hutchinson attributed the drop in part to seasonal strength from tax refunds, but said the bank expects to write off more debt through the rest of the year, forecasting a 2024 rate of 2.1%.
As Ally has upped its underwriting standards and focused more on prime borrowers, Hutchinson said the loans made in 2023 and beyond should show lower levels of delinquency. In the first half of this year, 42% of charge-offs were on loans from 2022. Moving into 2025 and beyond, Hutchinson said he thinks the charge-off rate will settle in the 1.6% to 1.8% range.
The bank saw $9.8 billion in auto loan originations in the second quarter, down from $10.4 billion a year prior, but 44% of this quarter's loans were in the highest credit tier.
Ally is sticking to its plan for the future, said CEO Michael Rhodes on his first earnings call at the company since taking the reins April 1, after serving in the top role at Discover Financial Services. Rhodes took over from veteran CEO Jeffrey Brown, largely credited as the architect of the reborn Ally after the financial crisis.
Rhodes said he thinks Ally is "uniquely positioned in our industry with a very attractive earnings ramp." He added that now is the time to execute.
"[I want to] reflect how grateful I am to inherit this well-respected and well-positioned company, and [my] really tremendous respect for what the team has built," Rhodes said. "As CEO, an important part of my job is to constantly think about and evolve the strategy. But right now, my primary focus is to execute on the plans we have in place."
