Did Subprime Auto Loans Just Claim Their Very first Victim In Ally Financial (ALLY), Benzinga
Did Subprime Auto Loans Just Claim Their Very first Victim In Ally Financial?
Auto lender Ally Financial Inc (NYSE: ALLY) on Tuesday let out a hint that exposure to subprime loans could be hurting it, as used car prices proceed southward.
Toned Down Adjusted EPS Expectation For 2017
In its financial outlook update issued Tuesday, the company lowered its two thousand seventeen adjusted earnings per share growth outlook to Five–15 percent. This represents a scale back from the guidance it issued on its fourth-quarter earnings call, when it suggested that two thousand seventeen earnings per share growth may be bashful of fifteen percent but still very solid, with acceleration expected in two thousand eighteen and 2019.
The shares fell Two.9 percent on Tuesday in reaction to the tempered outlook.
The medium-term adjusted earnings per share growth forecast is at a 15+ percent CAGR.
Sequentially Flattish Near-Term Revenue Outlook
Concerning its near-term revenue outlook, Ally Financial said it expects net financing revenue to remain fairly vapid sequentially, given the lease yield of about Five.Five percent due to lower vehicle prices. The company, however, expects this metric to improve seasonally in the 2nd quarter.
Other revenues are also expected to be vapid, albeit the company expects more benefit from fresh products in the 2nd half of 2017. The company sees about $9 billion in auto originations.
Headwinds The Industry Faces
Providing an update on the auto lending market, Ally Financial said rising interest rates, and interest rate expectations would pressure the auto lending market.
The company also noted that consumer credit losses proceed to migrate higher, particularly in lower credit tiers. Apart from these, the industry is also facing headwinds – such as declining used vehicle prices, enhancing manufacturer incentive levels and many captive arms of manufacturers continuing to increase their leasing presence.
When vehicles come off leases, it floods the market with used cars, and this further depresses used car prices.
In 2016, used business accounted for forty two percent of Ally Financial’s originations of $36 billion. Fresh retail standard accounted for $17 billion and leases $Trio.Four billion.
How Lower Used Car Prices Hurt?
A decline in used car prices means a decline in the value of the collateral on the loan extended. This results in companies enhancing provisions against future losses. Additionally, lower car prices suggest that finance companies can recover only less amount on repossessed cars.
Ally said on Tuesday that it expects a 5-percent drop in used car prices in 2017, albeit thus far in the very first quarter, used car prices fell seven percent, resulting in a $15 million to $20 million expense.
A Déjà Vu Feeling With Subprime Loans
A Bloomberg report, quoting S&P Global Ratings, said losses on auto loans of lenders were an annualized 9.1 percent in January, up from 7.9 percent in the year-ago period, marking the worst since January 2010. Recoveries on subprime loans also fell to 34.8 percent in January.
The subprime loans are packaged into bonds and sold to investors, who now seek higher comes back from them due to the risk involved. Consequently, the borrowing costs of the lending companies increase.
Meantime, non-prime loans’ share of Ally Financial’s total originations had dipped to 11.Four percent in two thousand sixteen from $14.Four percent in 2015.
Other auto lenders such as Credit Acceptance Corp. (NASDAQ: CACC), Santander Consumer USA Holdings Inc (NYSE: SC) and Capital One Financial Corp. (NYSE: COF), which have significant exposure to subprime loans may also see their financial spectacle hit by these headwinds. Are these companies hurtling toward a Lehman Brothers-like disaster? The very first quarter earnings release and the ensuing conference call may have more answers.
