Ally Financial Warns of ‘Choppy’ Quarters as Auto Income Falls

Ally Financial CEO Michael Rhodes says the company’s next few quarters will be “choppy.”

In a third-quarter earnings presentation Friday (Oct. 18), the auto lender said it had imposed stricter standards for borrowers by instituting tighter verification requirements for proving income and employment.

“Our origination trends reflect a deliberate strategy to be increasingly selective in our underwriting with a focus on prioritizing risk-adjusted returns over origination volume,” Rhodes told analysts during an earnings call.

“We have moved up significantly in terms of borrower credit quality since early 2023 which will be a tailwind to delinquency and frequency over time.”

The bank said its pre-tax income in the auto segment came to $175 million, down $202 million year over year, chiefly because of higher retail net charge-offs and loss reserves. Also down was the lender’s net financing revenue — $1.285 billion, a $75 million decrease — due to elevated funding costs.

Ally Chief Financial Officer Russell Hutchinson provided some color into the bank’s situation during the earnings call.

“Of course, respectful of the fact that we are a full spectrum lender and that we are primarily used vehicles, I think we’re all kind of dealing with a unique set of circumstances that arise coming out of the pandemic in terms of what we saw in 2022,” he said.

In that year, Ally dealt with consumers facing higher prices at dealerships, higher prices for used vehicles, and “some of the dynamics around excess savings” after the pandemic.

“I think we’re all dealing with that, and we’re all dealing with kind of elevated loss content across our vintages, but in particular, with the 2022 vintage. And that was a large vintage for us here at Ally, as you know,” Hutchinson said.

“I think as we look at credit bureau data, what we see with the credit bureau data for — on a like-for-like basis, kind of very similar. And so again, kind of gives us confidence that what we’re seeing isn’t different from the industry.”

The earnings came a little more than a month after Ally saw its share price drop by double digits as executives said the pressures faced by its borrowers were leading to delinquencies and charge-offs rising across its loans.

“Our borrower is struggling with high inflation and cost of living, and now more recently, a weakening employment picture,” Hutchinson said at a financial conference last month.