Ally Financial Stock Crashes as People Fall Behind on Car Loans

Intro Alli Financial is one of the biggest lenders in the automotive space and their stock is crashing today after comments by their CEO through cold water on The Narrative of the soft landing and the strong and resilient us consumer The CEO's Statement what's up guys I'm nobody special and Alli Financial stock is down more than 18% as of the making of this video after these comments from CEO Michael rhs at the Barclay's Global Financial Services conference in New York City and so with that let's turn to Auto and so as I said earlier on the retail auto side our credit challenges have intensified over the course of the quarter in July and August we saw delinquencies up about 20 basis points versus our expectations and we saw net charge offs up about 10 basis points versus our expectations we're clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that's worsened unemployment up approximately 50 basis points since the beginning of this year in particular we spent a lot of time looking at the late stage delinquencies so looking at 61 day plus days past due and those delinquencies in particular we're looking at because those reflect really kind of the pool of struggling borrowers and as that pool of struggling borrowers and those later stage delinquency buckets has grown it gives us pause in that as we kind of think about that 10 basis points of underperformance on net charge offs in July and August our senses that's probably going going to expand in coming months just given the size of this population of struggling borrowers and so that's really kind of one of the things that's put us on notice around credit development so there's a lot of Banker speak involved there but what allly CEO Michael rhs is telling us here is that consumers have been beaten down by the one two punch of the rising cost of living and now Rising unemployment and that is translating directly into more people missing their car payments and car payments is the bread and butter over at Ali financial and to add a Car Dealership Guy Chimes in little bit more clarity into what's going on in the auto space we got this timely post from car dealership guide today on X news autol loan delinquencies keep climbing subprime delinquencies fight goes with a 580 to 669 credit score jumped by 26 basis points to 5.17% in August even prime loans those with a credit score of 660 to 719 saw a slight uptick to a half a 1% overdue the reason consumers with auto loans originated in the last 2 years are falling further behind as elevated interest rates and vehicle prices squeeze household finances of subprime auto loans originated in 2023 13.4% are 30 to 90 days past due and there's another red flag loss severities the portion of value investors lose when borrowers default on 2023 subprime loans are the highest on record bottom line consumer resilience has kept the recession at Bay but it could be reaching its limits now it was that last Falling Car Prices and 2023 Vintage Loans Point by car dealership guy that really stuck out at me about falling vehicle prices because remember as people default on their car loans and their cars get repoed the only way the lender can recover any of that money he's losing is by selling the car on the secondhand market and as you can see here in the Manheim used vehicle value index the price of a used car has fallen sharply since its high in 2021 so those loans that were made in the last few years particular are vulnerable here because you're repossessing a car that has lost a lot of value now typically repossessing a car is a losing proposition anyway because the second you drive it off the lot it depreciates heavily but this chart shows that has been particularly potent for these last few years and also very important in that post from C dealership guy was he made reference to those 2023 loans being more than 133% delinquent and that is of particular importance when it comes to Ali Financial Other Banks Scaled Back Auto Lending in 2023 now to understand why those 2023 loans are so important to Ally financial we got to set the table with this article from Bloomberg back in June of last year citizens Financial ends autol lending with car dealers as Banks pull back Fifth Third among lenders reducing origination in the sector and keycorp previously sold an indirect autol loan portfolio citizens Financial Group is halting new auto lending it does in partnership with car dealers as Financial Services firms continue to curb their exposure to the sector now we're talking about citizens Financial in this article and this video is about Ally but the point is last summer a lot of lenders were pulling back from their lending in the automotive space and they go on to detail that in this article other Financial firms have pulled back from Auto lending as historically High used car prices leave borrowers underwater on their auto loans in 2021 key Corp sold its indirect autol loan portfolio for $3.2 billion to a subsidiary of waterfall Asset Management in an interview late last year Fifth Third Bank Corp Chief Tim Spence said the bank was reducing autol loan origination and more recently Capital 1 Financial corpse said in April that it was winding down a lending business that car dealerships use to buy inventory and lenders including Ali Financial have taken a hit on their Auto lending as Consumer Credit worsen so this article from last June is talking about all these banks that were pulling back their lending in the auto space because they could read the writing on the wall WS car prices were falling delinquencies were Rising the consumer was hurting and they were predicting a rise in unemployment being caused by the fed's rate hikes now you'll notice that this article made no mention of Ally Financial reducing their lending in the Ally's Ill-Fated Decision auto space and there's good reason why Bloomberg didn't mention that because Ally Financial did not reduce their lending in the auto space last summer when every other bank was take this one from American Banker on July 19th of last year allies says auto market remains attractive since others are pulling back Alli Financial continues to see the US Auto Market as quite healthy overall even as some lenders pull back and more consumers fall behind on their payments some credit unions and banks have retreated from the sector but allly CEO Jeffrey Brown said that void leaves opportunities for Ally and other lenders that have maintained a large presence in Auto lending including JP Morgan Chase and capital 1 Financial Auto lending remains a really attractive market for us Brown said on the company's second quarter earnings call the company made some $10.4 billion in auto loans during the second quarter up from 9.5 billion in the first quarter Executives said that it did so while being pickier in the loans that it selected and charging higher interest rates to compensate for greater risks for people that are in and committed like Chase like cap 1 like ourselves it's still a very attractive Market opportunity at very aggressive return returns right now brown said so we recognize credit may be a little bumpier than expected but the returns that we're putting on are pretty much at lifetime highs for the company so Alli Financial had dollar signs in their eyes they knew car prices were falling they knew there was risk in that market but they were making so much money on those loans especially as they were gobbling up market share while other Banks pulled out that allies saw no reason to slow down lending and that may have something CEO Jeffrey Brown's Sudden Departure to do with this one in PR news wire from October 11th of last year Alli Financial CEO Jeffrey J Brown announc his plans to step down Brown abruptly announced his resignation in October of last year that was an announcement that spooked investors because no replacement CEO had been announced he was just abruptly leaving the company you think maybe this had something to do with that ill-fated decision to not pull back their lending in the automotive space so long story Long Story Short short last summer all the major players in the automotive lending space saw the writing on the wall they saw the rising delinquencies they saw the falling car prices the rising interest rates prospects for higher unemployment and they all decided this is too risky we're going to dial back our lending that is everyone but Ali Financial Ali Financial saw everybody else getting out of the pool and said the water's fine I'm staying I'm making great money here yeah I get that the risk is there but hey look at those margins and now they're paying the price the CEO Jeffrey Brown who made that decision he was out of there in October and now Michael rhods is left to clean up the mess and he is warning at that Barkley's conference this morning that there are big losses on the horizon for Alli financial and that stock is paying the price as of the making of this video it is down 18% and I would add that this is spread to other Financial stocks such as JP Morgan Chase Capital One Financial City Bank all down today also other Consumer Financial stocks like American Express and a firm were also down today on this news and even a name we haven't heard in a while New York Community Bank was down almost 10% at one point today although those losses have been clawed back so this story of the consumer getting weaker over at Ally Financial it's not an isolated incident it's dragging down the whole financial sector today and once again this silly Narrative of the soft Landing of the strong and resilient consumer really all it is is a story about consumers borrowing money they don't have and we're learning now from Ali Financial that they can't pay that money back and so the credit losses are expected to get very big how big only time will tell till next time live small and dream big