Why Ally Financial shares fell 10.2% this week

What happened

Allied Financial (ALLY -0.72%) saw its stock price fall 10.2% this week on third-quarter earnings that fell short of analysts’ expectations. The stock price stood at $29.25 per share at market close last Friday and fell to $26.26 at the closing bell on Thursday. Ally is down about 45% year-to-date.

The major indexes were all up this week, with the S&P500 and the Dow Jones Industrial Average gaining around 2.2% through Thursday’s close, while the Nasdaq was up 3.2%. This does not include Friday, when markets rose significantly across the board.

So what

Ally Financial, a leading online bank specializing in auto loans, had a tough third quarter as it missed revenue and profit estimates.

Ally reported net income of $272 million in the quarter, down 40% from the same quarter a year ago. Adjusted earnings per share (EPS) was $1.12, down 48% year over year. Analysts had estimated adjusted EPS of $1.73 – so that was a big miss.

Revenue rose 2% year over year to $2 billion, but was below the consensus estimate of $2.15 billion.

One factor that hampered Ally during the quarter was the write-down, or permanent reduction in value, of a non-marketable equity investment linked to Ally’s mortgage business. This had a $0.33 per share impact on EPS. The other factor was a higher provision for credit losses. The company set aside $438 million during the quarter, compared to $76 million in the third quarter of 2021. This was done to protect against possible recessionary conditions in the coming months and due to higher growth in auto loans.

Consumer auto purchases hit $12.3 billion, marking the third highest quarter since 2006. This included $7.9 billion, or 64%, of used retail volume. Overall lending increased by $4 billion in the quarter, reflecting a provisioning of $133 million. Net charges increased 78 basis points year over year to 1.05%.

Now what

Net interest margin (NIM) was 3.8% in the quarter, up 15 basis points year-on-year. On the earnings call, CEO Jeff Brown forecast a 3.5% NIM in the fourth quarter, reflecting economic pressures caused by inflation, rising interest rates, slowing economic growth and production and supply chain issues in the automotive market. Also, inflated used car prices are expected to come down.

“We are forecasting loan growth of $2 billion to $3 billion expected in the fourth quarter in our consumer and commercial finance portfolios, so reserves will grow as we grow the balance sheet,” Brown said during the briefing. call for results. It forecast adjusted EPS of about $1 per share in the fourth quarter.

Ally’s book value has fallen sharply and it now has a price-to-book ratio of 0.78, meaning it is trading below book value. Its forward price-to-earnings ratio is just 3.75.

I like the long-term stock because of its efficiency and leadership in the auto finance market, as well as its very cheap valuation. But the short term should be difficult, given the economic environment.

Ally is an advertising partner of The Ascent, a Motley Fool Company. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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