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Post: : Ally Financial cuts view as it prepares for more auto loans that won’t be repaid

Ally Financial Inc.
ALLY,
-8.60%

on Wednesday missed its third-quarter earnings and revenue targets and issued a weaker-than-expected profit outlook for the coming quarter, as the consumer lender marked down the value of an investment in a digital mortgage provider.

CEO Jeffrey J. Brown said the company faced a challenging environment, as it built up larger coverage to “ensure the company remains protected as recessionary conditions feel more likely to occur in the coming months.”

Looking ahead to the fourth quarter, Ally Financial said it expects earnings of about $1 a share, below the latest Wall Street analyst estimate of $1.58 a share.

In another troubling sign, the company said it expects 1.6% intermediate-term net auto loan charge-offs, a figure that represents money the company does not expect to collect. The 1.6% figure is at the high end of its 1.4% to 1.6% projection for net charge-offs on auto loans.

During the third quarter, total loans grew $4 billion and drove a $133 million increase in its provisions. The company also booked a $136 million impairment on its investment in Better.com to reflect conditions affecting the broader mortgage industry.

All told, Ally Financial’s third-quarter net income fell to $272 million, or 88 cents a share, from $712 million, or $1.89 a share, in the year-ago quarter.

Adjusted profit fell to $1.12 a share from $2.16 a share in the year-ago quarter, while net revenue rose to $2.02 billion from $1.99 billion.

The company also issued an adjusted revenue figure of $2.09 billion.

Wall Street analysts expected Ally Financial to earn $1.69 a share on revenue of $2.16 billion, according to FactSet data.

On Tuesday, the company said Jennifer A. LaClair departed from her position as chief financial officer. Bradley J. Brown, corporate treasurer, has been appointed interim CFO.

Shares of Ally Financial fell 4.5% on Wednesday, amid mostly lower equity prices in the session.

Also Read: Goldman beats lowered earnings target and unveils plan to reorganize under three business units

Third-quarter auto loan originations of $12.3 billion were flat with the year-ago quarter and down about $1 billion from the second quarter.

Ally CEO Brown said while some lenders are pulling back from the auto lending space, the prime segment of that market remains robust.

“Prime lending continues to be a very solid space,” Brown said. “Super prime lending has seen very aggressive pricing from the credit unions and it makes sense that some banks don’t want to chase that.”

The bank said its net interest margin excluding original issue discount (OID) was 3.83%, which is up 15 basis points over the year-ago period but down 23 basis points quarter over the previous quarter.

“Given the duration dynamics on both sides of the balance sheet, we expect to see some near-term pressure, but remain confident in an upper 3% net interest margin over time,” CEO Brown said. “We built a structurally enhanced balance sheet over several years, but [we] face some temporary pressure from the unprecedented pace and magnitude of the increases in the short-term interest rates.”

Also Read: Adjustable-rate mortgage applications rise to highest level since March 2008, while applications fall overall

Ally said its provision for credit losses increased $362 million to $438 million, reflecting credit losses that are normalizing in line with expectations and current expected credit loss reserve build, which is partly attributable to robust retail auto origination volume.

Jefferies analyst John Hecht said Ally’s third-quarter net financing revenue of $1.72 billion beat his estimate of $1.64 billion, driven by higher origination volume and incremental loan growth, which outweighed higher funding costs.

Shares of Ally Financial are down 42% in 2022, compared to a 17.8% drop by the Financial Select SPDR ETF
XLF,
-1.95%

and a 22.3% loss by the S&P 500
SPX,
-1.07%
.

Also Read: Used cars have depreciated slightly—when to expect the car market to be normal again

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