What happened
Shares of the large auto lender Ally Financial (NYSE: ALLY) have fallen 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 over the company's near-term credit profile.
So what
Management said that losses in its retail auto portfolio are trending higher than expected, as borrowers deal with a higher cost of living and rising unemployment. Management also said that delinquencies in July and August are up 20 basis points versus its expectations and that loan losses are set to expand in the coming months.
When a management team misses its own guidance, investors start to doubt its ability to provide accurate guidance, and this is 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 moved to 2.1% and now it's likely to move higher yet again.
With delinquencies moving higher, management is going to have to build its allowance for credit losses by taking higher quarterly provisions, which will cut into earnings. While most of the issues are arising from loans originated in 2022, management didn't sound entirely convinced that vintages from 2023 would continue to outperform 2022, despite having tightened the credit box in 2023.
Now what
The comments from management are concerning and I would have hoped for more promising sentiment around the 2023 vintages. That said, with the big sell-off, the stock is now trading around 93% of tangible book value.
Furthermore, management said it is "absolutely committed" to its 15% return on tangible common equity goal and the company should see significant growth to its margin when deposits eventually reprice in a lower interest rate environment. I would obviously like to see management stop missing its own guidance. Next quarter, it should boost reserves so it is in a conservative position and present credit goals it won't miss.
If investors can handle some near-term volatility, I think it's to dip their toe in at this valuation because now some of the concerns are priced in. Also, if management does hit that 15% ROTCE goal the stock will certainly enjoy a higher valuation. But I would wait until there is further visibility on the company's credit outlook before making Ally a sizable position in your portfolio.
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