Auto loan payoffs rose sharply at Ally Financial in the fourth quarter, but executives say they are well prepared for economic turmoil and further declines in used car values.
More consumers are struggling to pay off their auto loans from Detroit-based Ally, whose retail auto net payoffs rose to $347 million last quarter, up from $217 million three months earlier.
Cancellations surpassed their pre-pandemic levels and are three times higher than in 2021, when government stimulus, elevated savings and lower inflation put consumers in a stronger financial position, according to quarterly results released by the company on Friday.
ally is planning for cancellations to increase further this year if a recession hits, but CEO Jeffrey Brown said the bank has built up reserves for any loan losses and is taking other steps to limit concerns about credit quality.
“The final path of the economy in the near term remains fluid, but we feel very good about the reserve and the capital position of the company,” Brown said on an earnings call.
Investors seemed to like his message, with Ally shares rising on Friday and climbing nearly 19% to $31.12 a share. The gains helped stocks recover from the beating they’ve taken since peaking at around $55 a share in 2021; the subsequent drop was driven in part by concerns that the pandemic boom in used cars would be followed by more consumer defaults.
While the stakes are higher and the quarter “had modest options,” Ally’s results “reflected focused execution in an increasingly difficult market,” Jefferies analyst John Hecht wrote in a note to clients.
Loans Ally made between the third quarter of 2021 and the second quarter of 2022 are experiencing higher losses, executives said. But newer loans are doing better, thanks to Ally’s stricter underwriting standards, as well as higher prices to cover bigger risks.
That more cautious approach has led to a slowdown in auto loan origination. The company made $9.2 billion in auto loans to consumers in the fourth quarter, down from $12.3 billion in the prior quarter.
“We cut back considerably in the fourth quarter from where we had been running,” Brown said.
Part of the pullback is due to “being more and more deliberate in credit management” and taking a little less risk. But there is also an element of consumer demand, with less willingness to borrow as interest rates continue to rise. “You’ve reached a saturation point with consumers,” Brown said.
Higher loan rates helped Ally beat market expectations for its net interest income, mitigating the impact of its higher deposit costs.
Ally, whose rate on high-yield savings accounts has risen to 3.3%, continues to attract new depositors, but paying more in interest. Interest costs related to the company’s deposits rose to $946 million last quarter, up 67% from the $567 million it posted in the third quarter.
But the interest he received on the loans also increased, and his net interest margin of 3.65% was higher than consensus estimates of 3.49%, according to Wolfe Research analyst Bill Carcache. As for the jump in Ally’s stock, Carcache said it was partly because the company “addressed many of the key concerns that have been weighing on the stock” with detailed insight on some critical issues.
A major question facing Ally is how much more used-car prices will fall, after a spike early in the pandemic, as supply chain challenges hugely hampered new-car manufacturing. Since then, automakers have ramped up production a bit, and used car prices have fallen in recent months.
A steeper-than-expected drop in used-car prices would reduce the value of the collateral Ally recovers when consumers default on their auto loans, pushing payoff numbers higher.
Ally executives have been bracing for a 30% drop in used car prices from their highs. Last year’s declines totaled 19%, and executives project some additional declines this year within the forecast range.
Morgan Stanley analyst Betsy Graseck asked Ally executives about the impact on cancellations if prices fall more than they currently expect.
Brown said many industry forecasters anticipate the declines to be more modest and that the still low auto manufacturing numbers provide “some structural support” to used car prices as consumers are less able to buy new cars. .
Ally executives “always try to take a more conservative view,” Brown said, but the chances of a much steeper decline leading to significantly higher write-offs are “a bit unlikely.”
