Shares of Ally Financial (ALLY, Financial) have declined 16.5% this week, a movement driven by concerns raised during management's presentation at an industry conference about the company's near-term credit profile.
Management reported that losses in its retail auto portfolio are trending higher than expected due to borrowers facing a higher cost of living and rising unemployment. Delinquencies in July and August increased by 20 basis points compared to expectations, with projected loan losses expected to rise in the coming months.
Earlier this year, management forecasted a retail auto loan loss rate of 1.9% for 2024, which was later revised to 2.1% during the Q2 2024 earnings call. It is likely to increase further. To address the higher delinquencies, the company will need to build its allowance for credit losses, impacting quarterly earnings.
Most issues stem from loans originated in 2022. However, management is not entirely confident that the 2023 vintages will outperform those from 2022, despite tightened credit criteria this year.
In terms of valuation, Ally Financial (ALLY, Financial) has a GF Value of $34.9, indicating it is currently fairly valued. The stock is trading at $33.11, a slight increase of 0.73% from its previous close. You can view more details on the GF Value of Ally Financial.
The company has 4 medium warning signs but no severe warning signs. Its price-to-earnings (P/E) ratio stands at 14.27 with a price-to-book (P/B) ratio of 0.88, suggesting it may be undervalued compared to its book value. Over the past year, the stock has seen significant fluctuations, with a 52-week high of $45.46 and a low of $22.54.
Despite the downturn, management remains committed to achieving a 15% return on tangible common equity and anticipates margin growth when deposits reprice in a lower interest rate environment. However, they aim to boost reserves and set more achievable credit goals in the next quarter.
Investors should closely monitor upcoming earnings reports and management’s strategies for addressing the increasing loan losses and delinquencies. The next earnings date is estimated to be on October 18, 2024.
