Why Ally Financial Shares Are Falling Today

A top executive from Financial ally (ALLY -17.62%) sounded the alarm on the state of the American consumer during a financial conference call on Tuesday, and investors heeded the warning, sending Ally shares down 17.7% as of 2pm ET.

Borrowers are struggling

Ally is a consumer-focused online bank with significant exposure to auto loans. It was once the lending arm of General Motorsbut has been an independent company since 2008. The bank has a lot of exposure to consumer credit, and the stock tends to be volatile when there are concerns about the health of the economy. On Tuesday, CFO Russ Hutchinson made the comments during an investor conference that put investors on watch.

Speaking to Barclays Global Financial Services conference, Hutchinson warned that credit challenges are intensifying and said these conditions could lead to Ally’s poor performance in the coming quarters.

“Our borrower is struggling with high inflation and the cost of living and now, more recently, a weakening employment picture,” Hutchinson said, according to media reports.

Is Ally stock a buy?

Based on Hutchinson’s comments, investors should expect Ally to consider increasing its reserves to cover bad loans. This would impact earnings and could cause Ally to reduce its guidance.

The good news is that Ally is healthy, and while its earnings could be hurt as it sets aside more funds to cover potential loan defaults, there’s nothing to suggest that these potential problems could cause it to topple. Lenders’ fortunes tend to ebb and flow with the economy, and what Ally is experiencing is a natural part of the business cycle that a well-run bank can handle.

At the current share price, Ally offers a dividend yield of more than 3.5%. For those who have the stomach to wait out what could be a period of intense volatility ahead, Tuesday’s dip in stocks could be a buying opportunity.