Ally Financial forecasts its retail auto net charge-offs (NCO) to be between 1.8% and 2.1% of its portfolio by the end of its fiscal year, Chief Financial Officer Jennifer LaClair said in the company’s earnings call today. Along with shoring up its allowance for credit losses, the auto lender reported a strong second quarter with surging used-vehicle originations.
Auto loan outstandings remained mostly flat year over year at $72.3 billion. Auto lease outstandings net of depreciation increased to $9.1 billion from $8.4 billion in the same reporting period.
The Detroit-based lender’s retail auto NCOs dropped to 0.76% in the second quarter from 1.44% last quarter. Ally expects these NCOs to increase between 104 and 134 bps by the end of the year, as 70% of its deferrals are set to expire in the third quarter.
Delinquencies 60-plus days past due have continued to fall since the end of 2019, dropping to 0.47% from 0.66% in Q1, in line with extended deferral programs. “Payment trends for this population have been in line with expectation,” LaClair said, noting that the vast majority of these customers entered the deferment in a nondelinquent payment status.
“We ended June with a quarter of our customers making payments, in spite of the fact that their deferrals weren’t expiring,” she added. “We’re very encouraged by that.”
Ally Financial also fortified its allowance for credit losses by setting aside $3.4 billion — 2.85% of its loans outstanding — up 31 basis points from Q1 and 186 bps YoY. The increase in allowance for credit losses was three times more than the lender’s reserve balances in early 2016, LaClair added, “even as the relative size and risk profile of our balance sheets have remained stable.”
Originations performed better than pandemic expectations, LaClair said, even as the lender reinforced its credit losses. Ally reported $7.2 billion in total new loan originations, down 20.9% from Q1 and 25.8% YoY. Originations were sourced from 3.1 million decision applications, said Chief Executive Jeffrey Brown, noting “the number of dealers that submitted applications to Ally reached the second highest level ever” in the second quarter. This, he added, reflected a strong demand in used cars.
Used vehicles made up approximately 60% of Ally’s originations in the second quarter, LaClair said, adding this is the “highest level we’ve seen as a company.” The strong used-vehicle originations took place as used-vehicle values skyrocketed after plummeting in April. Used-vehicle values are now at 155.9 on Manheim’s mid-July used-vehicle value index, up 11% YoY. “The moratorium on repossessions actually helped to continue to bolster used-vehicle prices,” LaClair said.
While increases in used-vehicle interest may be a direct result of pent-up demand in June, “July is still moving forward, very strong in originations,” LaClair added. Used-vehicle originations have bolstered drops in new vehicles, which have been strangled by tightened inventories. “Production has largely resumed and we expected balances will slowly build over the coming months. In the interim, new vehicle floorplan shortages will challenge dealer sales activities.”
Ally dealer floorplan balances dropped to $20 billion, a 19.5% drop from Q1 and a 30.3% drop YoY. Thirty-nine percent of wholesale dealers deferred floorplan interest, and insurance payments dropped 20 percentage points from initial dealer requests during the second quarter.
Ally Financial [NYSE: ALLY] shares were trading at $21.34 as of 3:27 p.m. ET., a 4.75% decrease since market open. The Detroit-based bank has a market capitalization of $7.95 billion.
Originally published on Auto Finance News