While Ally Financial expects the strong used car market to falter over the next two years, there are no signs of a downturn yet.
The Detroit-based lender continues to benefit from robust auto sales and subdued borrowing costs, which are keeping financial returns well above pre-pandemic levels.
“Where we write prime and particularly at the intersection of used and prime, there is always tremendous trading volume,” Chief Financial Officer Jenn LaClair said on a conference call with analysts on Thursday. .
LaClair estimated that 4-5 million consumers are currently on the sidelines of the automotive market simply because they cannot find a vehicle to buy.
“So not only do we expect this very strong origination volume to continue this year, but we expect it in the future,” LaClair said.
Ally reported first-quarter profit of $627 million, a 20% year-over-year decline largely due to a $167 million provision for loan losses. A year earlier, the company recorded a reserve release of $13 million.
The first quarter provision “reflects robust origination activity and the expected gradual normalization of credit performance,” Ally CEO Jeffrey Brown said on the conference call.
Although Ally’s first quarter earnings were down year over year, they still represented a significant jump from comparable net earnings in 2020 and 2019. For 2022 as a whole, Ally expects a return on tangible equity of 16% to 18%. range, compared to 12% in 2019.
Ally’s first quarter results and guidance for 2022 “reflect generally stable business with fundamental and fundamental growth amid improving returns,” John Hecht, an analyst who covers the company for Jefferies, wrote in a note. research.
Ally, which has $184.3 billion in assets, has raised its profile in mortgages and point-of-sale lending in recent years. And last year it expanded to credit cards with a $750 million, all-cash transaction for subprime issuer Fair Square Financial.
These moves have helped diversify the company’s balance sheet, but at its core Ally remains an auto lender, with auto loans accounting for nearly two-thirds of its $175 billion in earning assets.
Last year, Ally posted record profits of $3.1 billion, fueled by used car sales, which reached an all-time high of 40.9 million units nationwide.
As the market normalizes, Ally expects the average value of used cars to decline 10% to 15% by 2023. Still, conditions remained strong enough in the first quarter for Ally to provide auto loans to consumption totaling $11.6 billion, up 14% per year. over-year. Total consumer loans included $7.6 billion in used car loans.
Ally’s continued strength in the auto retail sector stems from a shift in focus toward prime borrowers, according to LaClair. She said super-prime consumers tend to wait to buy their preferred new-car option, even in the wake of pandemic-era supply chain disruptions.
LaClair added that even if used-car sales start to slow — as many observers expected — new-car sales and dealer loans should act as what she called a “natural hedge.” .
“I think Ally really wins anyway,” LaClair said.
Despite Ally’s expectation that credit quality will gradually normalize, it remained strong in the first quarter. Retail automotive net charges totaled $113 million, up slightly year-over-year but less than half the total from the first quarter of 2020.
Ally expects retail auto net charges, which represented 0.58% of loans in the quarter ending March 31, to remain below 1% throughout 2022, according to Hecht.
Ally reported mortgages of $1.7 billion in the first quarter, in line with its first quarter 2021 result, but down 41% on a linked quarterly basis. Point-of-sale loans of $442 million and credit card balances of $1 billion both increased significantly.
Ally reported deposits of $142 billion as of March 31, up 3% from the same period in 2021. Core deposits, excluding negotiated financing, were up 6% year-over-year .