Ally's Auto Lending Grew as Early Delinquencies Rose

Ally Financial's third quarter delivered growth and a warning in the same set of numbers. Auto originations rose 10% to $12.9 billion and adjusted earnings reached $1.34 per share, while early-stage delinquencies moved higher.

Loans at least 30 days past due increased to 4.02% from 3.93%, and accounts 60 days past due rose to 1.10% from 1.03%, according to the original reporting. Net charge-offs increased to $423 million from $395 million. The auto net charge-off rate was almost unchanged at 1.89%, compared with 1.88%.

Why the delinquency mix matters

A stable charge-off rate says realized losses have not accelerated materially. Rising 30-day and 60-day delinquencies show more borrowers entering the loss pipeline. Some will cure, refinance or return to current status, so early delinquency is not the same as a final loss. It is nevertheless a forward indicator for credit costs.

At the same time, demand remained strong. Ally processed about 4.8 million applications, up 20%, and expanded originations. More volume can support interest income, but it also makes underwriting quality important if household finances are weakening.

Profitability improved

Net income rose to $433 million from $398 million, while revenue increased to $2.33 billion from $2.17 billion. Net interest margin improved to 3.62% from 3.51%, meaning Ally earned a wider spread between the yield on assets and the cost of funding.

That margin improvement gives the lender more capacity to absorb credit normalization. It does not eliminate the risk. If delinquencies continue to rise, provisions and charge-offs can consume the benefit of stronger spreads.

The quarter does not support either an alarmist or complacent reading. Ally grew originations, applications, revenue and earnings, while the earliest credit indicators deteriorated modestly.

Investors should focus on roll rates, which show how many 30-day delinquencies become 60-day or 90-day delinquencies, and on loss severity when vehicles are repossessed. Stable charge-offs with improving cures would validate the growth. A sustained increase in later-stage delinquencies would show that the current earnings strength is carrying more credit risk.