By Steve Gelsi
Ally sees a squeeze in short-term net interest margin, but says prime auto loans remain strong
Ally Financial Inc. (ALLY) on Wednesday missed its third-quarter profit and revenue targets and issued a weaker-than-expected profit outlook for the coming quarter as the consumer lender wrote down the value of an investment in a digital mortgage provider.
CEO Jeffrey J. Brown said the company faces a challenging environment as it has developed broader coverage to “ensure the company remains protected as recessionary conditions appear more likely to occur in the months coming”.
Looking ahead to the fourth quarter, Ally Financial said it expects earnings of about $1 per share, below Wall Street analysts’ latest estimate of $1.58 per share.
In another troubling sign, the company said it expects 1.6% net auto loan write-offs over the medium term, a figure that represents money the company does not expect to collect. The 1.6% figure is at the upper end of his projection of 1.4% to 1.6% for net auto loan write-offs.
During the third quarter, total lending increased by $4 billion and resulted in a $133 million increase in its provisions. The company also recorded a $136 million write-down on its investment in Better.com to reflect conditions affecting the entire mortgage industry.
In total, Ally Financial’s third-quarter net income fell to $272 million, or 88 cents per share, from $712 million, or $1.89 per share, in the year-ago quarter.
Adjusted earnings fell to $1.12 per share from $2.16 per share in the year-ago quarter, while net income rose to $2.02 billion from $1.99 billion.
The company also posted adjusted revenue of $2.09 billion.
Wall Street analysts had expected Ally Financial to earn $1.69 per share on revenue of $2.16 billion, according to FactSet data.
On Tuesday, the company announced that Jennifer A. LaClair had left her position as chief financial officer. Bradley J. Brown, the company’s treasurer, has been named interim chief financial officer.
Shares of Ally Financial fell 4.5% on Wednesday, amid falling stock prices during the session.
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Auto loans in the third quarter of $12.3 billion were flat from the year-ago quarter and down about $1 billion from the second quarter.
Ally CEO Brown said while some lenders are exiting the auto lending space, the core segment of that market remains robust.
“Prime lending continues to be a very strong space,” Brown said. “Super prime lending has seen very aggressive pricing from credit unions and it makes sense that some banks don’t want to pursue that.”
The bank said its net interest margin excluding initial issue discount (OID) was 3.83%, up 15 basis points from a year earlier but down 23 basis points. basis from the previous quarter.
“Given the duration dynamics on both sides of the balance sheet, we expect some near-term pressure, but remain confident of a 3% higher net interest margin over time,” CEO Brown said. . “We have built a structurally strengthened balance sheet over several years, but [we] face temporary pressure from the unprecedented pace and magnitude of increases in short-term interest rates.”
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Ally said its provision for credit losses increased from $362 million to $438 million, reflecting credit losses normalizing in line with expectations and the current build of expected credit loss reserves, which is partly attributable to the heavy-duty automotive mounting volume.
Jefferies analyst John Hecht said Ally’s third-quarter net funding revenue of $1.72 billion topped its estimate of $1.64 billion, thanks to higher origination volume. and further loan growth, which outweighed higher funding costs.
Ally Financial shares are down 42% in 2022, compared to a 17.8% decline for the Financial Select SPDR ETF (XLF) and a 22.3% loss for the S&P 500.
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(END) Dow Jones Newswire
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