Ally's Brown offers upbeat assessment of troubled partner Carvana

Ally Financial CEO Jeffrey Brown gave the beleaguered online used-car retailer Carvana a vote of confidence Tuesday during a presentation at the Goldman Sachs U.S. Financial Services Conference. 

Brown, American Banker's 2022 Banker of the Year, called Carvana a "good partner," though he acknowledged the Phoenix company is experiencing a particularly rough patch. "Their model has been challenged by the higher cost of everything. Higher cost of moving cars to where demand is, higher cost for people, higher costs for building their facilities," Brown said. 

Detroit-based Ally is one of the nation's biggest indirect auto lenders, with more than 23,000 dealer clients, according to Brown. For it, Carvana is more than a source of loan applications. The company is a significant borrower, with a $2 billion credit line, secured by cars, Brown said. "We don't lend against their real estate, we don't run against their buildings they have in place today."

Not surprisingly, given those stakes, Ally is in "weekly, daily dialogue with [Carvana CEO Ernest Garcia] and his team," Brown said. So far he seems satisfied with what he's hearing. "Ernie runs a very good shop, a very clean shop," Brown said. "He's managing through the profitability side right now. We look at them as a very reasonable, responsible partner. … He's got a great model, and he'll get through this." 

A Carvana spokeswoman had not responded to a request for comment at deadline.  

Famous for its high-rise car vending machines, Carvana emerged as a financial golden child during the pandemic. Its online format offered consumers, flush with cash from stimulus checks but fearful of COVID-19 exposure, a tailor-made platform to go car shopping. Sales, which totaled 178,000 in 2019, jumped to 244,000 in 2020 and 425,000 in 2021. 

Carvana's stock price, which hit a pre-pandemic high of $110 in February 2020, initially plummeted as the coronavirus delivered a body blow to the U.S. economy in March 2020 but quickly began rising and didn't stop for more than a year. Carvana sharers peaked at $360.98 in mid-August 2021.

The company crashed back to earth in 2022, brought low in large part by inflation and sharply rising interest rates. This year's headlines have been dominated by declining sales, employee layoffs and — more recently — concerns about Carvana's long-term viability. In the wake of disappointing third-quarter results that saw Carvana report a quarterly loss totaling $283 million, analysts at Cowen & Co., Oppenheimer and Bank of America's Merrill unit announced downgrades. 

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Among other concerns, Carvana's third-quarter sales declined 13% linked-quarter to 102,570. The company announced 1,500 employee layoffs on Nov. 18, following a round of 2,500 job cuts in May. 

Carvana shares closed at $6.71 Tuesday. 

Given the scale of its auto industry involvement, Ally's operating results have also been affected by the volatile economy, but it has remained solidly profitable, reporting net income of $272 million for the quarter ending Sept. 30. However, that total was down from $683 million a year earlier. Ally's operating results have also been hurt.

Brown forecast total loan originations, including personal and residential mortgage loans as well as auto, would range from $47 billion to $48 billion in 2023, even as Ally tightens its credit standards. "We only approve about 35% of what we see," Brown said. "We've been more prudent than the market realizes over the past six months."

Ally's $137 billion deposit portfolio "grew in the third quarter and [is] growing in the fourth quarter," Brown said. "We have a 96% retention rate on our retail deposit book. I challenge any bank to show us something better than that."