October 20, 2020

Ally Q2 net income falls on virus impact

Net income fell nearly 60 percent for Ally Financial Inc., one of the largest U.S. auto lenders, in the second quarter as the lender absorbed further impact from the coronavirus pandemic. Volatile used-vehicle values, record-high unemployment and more than a million consumers exiting forbearance protections were among the reasons the bank allocated more funds to shield from potential auto loan losses for the second half of the year.

Ally reported net income of $241 million Friday, down from $582 million in the second of quarter 2019, though an improvement from the $319 million net loss it suffered in the first quarter. Adjusted revenue slid 1.9 percent to $1.53 billion in the second quarter.

The Detroit lender is bracing for losses in the back half of the year as expansive payment deferral programs are set to expire. Thirty percent of the auto customers Ally granted payment deferrals were slated to come out of forbearance in the second quarter, with the remaining 70 percent set to expire in the third quarter.

“Against a difficult and shifting backdrop, we remain focused on serving our customers at the highest level, and our solid operational and financial foundation positions us to continue supporting our customers,” CEO Jeffrey Brown said in a statement. “Our resilient and adaptable auto finance business saw meaningful improvement toward the end of the quarter.”

Shares of Ally closed Friday’s trading down 5 percent to 21.29.

Mitigating losses is a priority for the lender as it braces for a flood of consumers coming out of forbearance grace periods. Ally CFO Jenn LaClair said on an investor call Friday that consumers coming out of forbearance in the second quarter represented some of the lender’s riskier borrowers and that the bulk of the deferred accounts with payments more than 30 days past due expired in that period.

In the first quarter, 1.1 million borrowers requested forbearance from Ally, 70 percent of which never had a late payment. One-fourth of Ally’s auto loan customers asked for payment deferrals in the first weeks of the pandemic.

Payment performance of these borrowers has so far been positive and in line with expectations, LaClair said. Twenty-four percent of borrowers in forbearance status made car payments ahead of schedule.

Deferment requests tapered off substantially in May and June from March and April highs. To date, Ally has processed 1.31 million cumulative deferral program accounts, with 87 percent of customers up to date on their payments.

To protect from future credit losses, Ally also applied more manual underwriting processes in lieu of automated decisioning and raised the credit threshold for auto loan customers, she said.

Provisions for loan losses, or the cash a lender sets aside for loans it does not expect will be repaid, were up $76 million year over year in the second quarter to $256 million for auto loans. Though elevated, that’s substantially less than the $766 million Ally allocated for auto-related loan losses in the first quarter.

The majority of Ally commercial dealers “actively participated in at least one-of-four COVID-19 relief offerings,” the Detroit lender said. Thirty-nine percent of wholesale dealers deferred floorplan interest and insurance payments to the bank in the second quarter, down 20 percentage points from dealer requests in the first wave of the outbreak.

Pretax income from Ally’s automotive finance business dropped 28 percent to $329 million, largely driven down by an increase in COVID-19 credit loss provisions.

Ally originated $7.2 billion in loans and leases in the second quarter, down 26 percent year over year and down 21 percent from the first quarter.

Originations were sourced from 3.1 million applications and driven largely by strong used-vehicle demand, Ally said Friday. Ally’s used-vehicle originations of $4.3 billion in the second quarter comprised roughly 60 percent of the total auto portfolio, its highest percentage on record for the lender. 

New-vehicle loan originations fell across the board in the second quarter, sliding 41 percent to $2 billion. Ally’s growth channel, which consists of business with franchised dealerships that sell brands other than those owned by Fiat Chrysler Automobiles or General Motors, was halved year over year to $600 million in originations. FCA originations fell 22 percent, and GM originations dropped 41 percent, both to $700 million. Leasing rates slid 18 percent in the second quarter, to $900 million.

“New-vehicle inventory is still pretty low,” LaClair said. “This environment, the stress on the consumer, the value of a used vehicle outweighs the price on a new vehicle.”