Why Ally Financial Shares Are Falling This Week

What happened

Shares of the big auto lender Financial ally (ALLY 0.67%) were down 16.5% this week as of 1:38 p.m. ET, according to data from S&P Global Market Intelligence. The move came after management presented at an industry conference earlier in the week and expressed concern about the company’s short-term credit profile.

So what

Management said losses in its retail auto portfolio were trending higher than expected as borrowers grappled with a higher cost of living and rising unemployment. Management also said that delinquencies in July and August rose 20 basis points from its expectations and that loan losses were set to widen in the coming months.

When a management team misses its own guidance, investors begin to doubt its ability to provide accurate guidance, and it’s not the first time this has happened this year. Earlier in the year, management predicted a retail auto loan loss rate of 1.9% for 2024. On the company’s Q2 2024 earnings call, that number jumped to 2.1% and is now likely to rise from new.

With delinquencies rising, management will need to build up its loan loss provisions by taking higher quarterly provisions, which will reduce earnings. While most of the issues stem from 2022 loans, management did not seem fully convinced that 2023 vintages would continue to outperform 2022 despite tightening the credit box in 2023.

now what

Management’s comments are concerning, and I would have hoped for a more promising sentiment around the 2023 harvests. That said, with the strong selloff, the stock is now trading around 93% of tangible book value.

In addition, management said it is “absolutely committed” to its 15% return on tangible common stock target and that the company should see significant margin growth when deposits rerate in a lower interest rate environment . Obviously, I’d like to see management stop missing their own guidance. In the next quarter, it should increase reserves so that it is in a conservative position and presents credit targets that it will not miss.

If investors can handle some near-term volatility, I think it’s to dip their toe at this valuation because now some of the concerns are being priced in. Also, if management achieves the 15% ROTCE target, the stock will surely enjoy a higher valuation. . But I would wait until there is further visibility into the company’s credit outlook before making Ally a sizeable position in your portfolio.