Ally Reports Unexpected Surge in the Number of Loan Delinquencies

Ally Financial reported loan delinquencies and charge-offs were higher than anticipated in the last two months. Speaking with investors, Ally CFO Russ Hutchinson said borrowers are hurting due to the rising cost of living and a slow job market. As a result, Ally’s credit challenges have increased in the current quarter.

Ally’s auto loan portfolio has been giving it the most trouble. According to Hutchinson, the financial giant saw delinquencies rise 20 basis points over previous expectations for July and August. Net charge-offs, essentially loans that Ally assumes will never be repaid, were 10 basis points higher than predicted. With the sheer number of borrowers currently struggling to make payments, particularly loans over 61 days past due, Ally expects net charge-offs to continue to climb.

Once Hutchinson’s comments reached Wall Street, the share price of the banking conglomerate tumbled 19% on Tuesday. The news also dragged down other financial stocks like Capital One down, which fell 4.6%.

Ally reduced its loan delinquency exposure earlier this year by selling its point-of-sale financing segment to Synchrony Bank. The agreement included Synchrony taking on loan receivables worth $2.2 billion and 450,000 active borrowers.

Formerly under the General Motors umbrella, Ally’s product focus remains on auto loans and dealer financing. While the institution also offers credit cards and mortgages, car loans make up about 70% of its lending portfolio.

Another potential factor adversely affecting Ally’s auto loan unit is lower demand for new vehicles. With the specter of inflation looming and high interest rates, buyers are shying away from dealers and are instead waiting for a better deal later.

While the CFO’s comments are not necessarily good news for the company, they are not entirely unexpected as Ally generally offers loans to risky borrowers, those with lower to middle credit scores. To compensate for the higher delinquency rates and increased charge-offs, the company plans to increase reserves to help cover future losses.