Investor scrutiny of the consumer finance sector has increased amid growing fears of a recession in 2023. The COVID-19 pandemic has provided a lot of help to struggling consumers. However, these support mechanisms appear to be expiring and delinquency is increasing.what does this mean Ally Financial (Allie 0.37%)?
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Ally is one of the largest auto lenders in the United States.
Ally Financial (formerly known as General Motors Acceptance Corp. (GMAC)) is one of the largest auto lenders in the United States. We also have Ally Bank, an FDIC-insured digital custodian. Ally also offers mortgage, business, personal, insurance, and investment services.
Delinquencies are on the rise, but keep a historical perspective
The Consumer Financial Protection Bureau (CFPB) has tracked delinquencies on auto loans and they were on the rise in 2022. This is seen across all percentiles, but is most pronounced with the lowest credit scores. That said, delinquency rates in 2020 and 2021 were unusually low, thanks to stimulus payments and the willingness of servicers to fix loans for borrowers in trouble.
To put the current delinquency rate into perspective, it is much lower than it was in 2019. So while the year-over-year increase in delinquency rates may seem alarming, it remains historically fairly low. The CFPB is concerned that dealers are using longer loan terms to make monthly payments more affordable, but auto loans are generally limited by the fact that vehicles depreciate over time. For most of the time it is “water scarcity”. Extended loan terms of 72 or 84 months exacerbate this phenomenon.
Car credit balances are growing, largely because car prices are rising. This was particularly noticeable during the pandemic when used car prices were rising (an anomaly for a depreciating asset), but it was also due to supply chain issues and generally higher labor and material costs.
In 2022, Ally’s delinquency rate continues to rise. His 30-day delinquency rate rose to his 2.93% in the third quarter. This is up from 2.52% in Q2 2022 and 1.83% in Q3 2021. As alarming as this sounds, Ally’s delinquency rate is: Pattern observed by CFPB.
Allies are trading cheaply compared to past multiples
Ally stocks have crashed this year as the Federal Reserve hiked interest rates to combat inflation. It’s trading at a very low price/earnings ratio (P/E) based on this year’s expected earnings. That said, earnings are expected to decline next year as bad debt charges are likely to increase.
ALLY PE ratio data by YCharts.
Wall Street analysts see Ally’s earnings at $5.99 per share in 2022, but are expected to fall to $4.29 per share in 2023. historically. The surge in her P/E ratio in 2020 is due to the financial sector preparing heavily for credit losses due to the introduction of the current Expected Credit Loss (CECL) framework and uncertainty over the impact of the pandemic. Note that .
Warren Buffett’s Berkshire Hathaway is the Ally Financial holder of that portfolio. It fits the Buffett model of doing a solid business at an affordable price. Ally also pays a decent quarterly dividend of $0.30 per share, giving the stock a 5% yield. The company has also raised its dividend over the past few years. Considering Ally is expected to make $4.29 per share next year, the dividend is well covered. In short, Allies are historically pretty cheap, so any increase in delinquency should be viewed from a historical perspective.
Ally is an advertising partner of The Ascent by The Motley Fool. Brent Nyitray, CFA has no positions in any of the mentioned stocks. The Motley Fool invests in and recommends Berkshire Hathaway. The Motley Fool’s U.S. Headquarters placed Berkshire Hathaway’s January 2023 $200 long call, Berkshire Hathaway’s January 2023 $200 short put, and Berkshire Hathaway’s January 2023 $265 short put. We recommend short calls. The Motley Fool’s U.S. headquarters has a disclosure policy.