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Shares of Ally Financial ALLY, one of the leading auto lenders, tumbled 16.6% last week. This was steeper than the industry’s decline of 0.4%.
One-Week Price Performance
What Triggered the Sell-off in the ALLY Stock?
If you observe the above price chart, you will see that Ally Financial shares plunged on Tuesday, Sept. 10 and remained on that level till the end of the week.
On Sept. 10, Russ Hutchinson, ALLY’s chief financial officer, presented at the Barclays Global Financial Services Conference in New York. During the conference, he warned of the deteriorating credit condition of its borrowers.
Hutchinson said, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.” He also noted that the company is witnessing increased delinquencies in its retail auto-loan business. Demand for auto loans is also subdued because of higher rates.
In July and August, ALLY’s delinquencies rose about 20 basis points (bps) above what was expected. Further, its net charge-offs or NCOs (debts that are not likely to be recovered) in the retail auto business were 10 bps higher than expectations in these two months.
Hutchinson stated that the company’s NCO rate is expected to rise further in the coming months (especially in the 61-plus-day delinquency bucket) as a large number of borrowers are struggling amid the weakening economic outlook.
What Next for Ally Financial?
As ALLY stock plunged last week, it is now trading at a loss in the year-to-date time frame. On the other hand, the industry gained 9.8%.
Its close peers – Capital One COF and SLM Corporation SLM – are better off. Shares of COF have rallied 6% so far this year and SLM is up 11%.
Year-to-Date Price Performance
Now, Ally Financial’s focus will be on managing capital levels and expenses. Nonetheless, Hutchinson noted that, for now, the company’s 2024 guidance remains unchanged.
ALLY expects loan losses to increase in 2024. Retail auto NCO rates are projected to be approximately 2.1% (a rise from 1.9% expected earlier), while consolidated NCOs are likely to be in the 1.45-1.5% range.
With the Federal Reserve embarking on its first interest rate cut since March 2020 later this week, Ally Financial will likely gain from it. The company’s net interest margin (NIM) in the third quarter is expected to expand in the low end of the 5-15 bps range from 3.3% in the second quarter of 2024.
The metric will rise further in the fourth quarter and reach 3.45-3.50%. This will result in a full-year 2024 NIM of almost 3.30%. NIM is expected to touch 4% by the end of 2025 as deposits eventually reprice in a lower interest rate environment.
Hence, rate cuts are expected to be immensely beneficial for ALLY’s top and bottom lines.
Sales Estimates
EPS Estimates
Nonetheless, as the company is expected to witness an increase in loan losses in the near term, its earnings will be under pressure. Hence, analysts are moving their earnings estimates lower over the past seven days.
Estimate Revision Trend
Also, ALLY stock is trading below its 50-day simple moving average. This is often seen as a bearish signal. This movement suggests a potential continuation of the downward trend, at least in the short term.
50-Day Moving Average
While it can easily be said that ALLY stock is a good long-term investment option, investors need to keep an eye on management comments and the third-quarter 2024 results (to be announced next month) before making any investment decision.
Currently, Ally Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
These ten large-cap stocks were the worst performers in the last week. Are they in your portfolio?
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Recasts first paragraph; adds Navient statement, CFPB director Chopra comments, 2022 settlement with states, paragraphs 1, 3, 7-12
By Jonathan Stempel and Douglas Gillison
Sept 12 (Reuters) - A U.S. regulator on Thursday banned Navient NAVI.O from servicing federal student loans, excluding the company once known as Sallie Mae from a market it once led, and ordered it to pay $120 million for years of student lending failures.
The U.S. Consumer Financial Protection Bureau said the ban would prevent Navient from servicing federal direct loans, and from directly servicing or acquiring most loans under the Federal Family Education Loan Program.
CFPB Director Rohit Chopra told reporters his agency was "closing the book" on Navient, saying the company "harmed millions of borrowers across the country."
The CFPB accused Navient of steering borrowers into delaying loan repayments even if they qualified for affordable repayment plans based on their incomes, causing them to pay more in interest, because it was cheaper and simpler.
It also faulted Navient for making mistakes in processing payments, and misleading borrowers about their rights.
The payment includes $100 million in restitution, and a $20 million civil fine.
Navient, based in Herndon, Virginia, said in a statement it disagreed with the CFPB allegations, but that the settlement "puts these decade-old issues behind us" and was a "positive milestone in our transformation of the company."
In January 2022, Navient reached a $1.85 billion settlement with 38 U.S. states and Washington, D.C. to resolve charges it made predatory loans that borrowers struggled to repay.
Navient said it no longer serviced or purchased federal student loans, having in 2021 transferred its contract to service government loans to a third party, and in July begun outsourcing the servicing of federally subsidized private loans.
In afternoon trading, Navient shares were up 6.2% at $15.57.
Chopra told Reuters in an interview that while Navient had been taking steps to move away from its past, Thursday's enforcement action ensured it would stay out of the business.
"They will need to transform their business because they will not be able to creep their way back into the student loan industry again," he said.
The settlement resolves a CFPB lawsuit filed in Scranton, Pennsylvania in January 2017, and requires a judge's approval.
Navient was the largest U.S. student loan servicer when the lawsuit began, handling more than $300 billion of federal and private loans for over 12 million borrowers, the CFPB said.
(Reporting by Jonathan Stempel in New York and Douglas Gillison in Washington; Editing by Chizu Nomiyama, Franklin Paul and Diane Craft)
(( jon.stempel@thomsonreuters.com ; +1 646 223 6317; Reuters Messaging: jon.stempel.thomsonreuters.com@reuters.net ))
Keywords: USA-CFPB/NAVIENT (UPDATE 3)
The S&P 500 Index today is up +0.58%, the Dow Jones Industrials Index is up by +0.06%, and the Nasdaq 100 Index is up by +1.52%.
After starting the day in the red, stocks have rebounded this afternoon. As reported in today’s US consumer price report, core consumer prices in August rose +3.2% y/y, unchanged from July and well above the Fed’s +2.0% target.
US MBA mortgage applications rose +1.4% in the week ended September 6, with the purchase mortgage sub-index up +1.8% and the refinancing mortgage sub-index up +0.9%. The average 30-year fixed rate mortgage fell -14 bp to a 19-month low of 6.29% from 6.43% in the prior week.
US Aug CPI eased to +2.5% y/y from +2.9% y/y in July, right on expectations and the smallest increase in 3-1/2 years. However, Aug CPI ex-food and energy was unchanged from July at +3.2% y/y, right on expectations.
In the wake of last night’s debate, the odds on the betting website PredictIt of Vice President Harris winning the presidency rose to 56% from 53% before the debate.
The markets are discounting the chances at 100% for a -25 bp rate cut for the September 17-18 FOMC meeting and at 19% for a -50 bp rate cut at that meeting.
Overseas stock markets today are lower. The Euro Stoxx 50 is down -0.04%. China's Shanghai Composite fell to a 7-month low and closed down -0.82%. Japan's Nikkei Stock 225 closed down by -1.49%.
Interest Rates
December 10-year T-notes (ZNZ24) today are up by +5 ticks. The 10-year T-note yield is down -2.1 bp at 3.622%. Dec T-notes today rallied to a 15-month high, and the 10-year T-note yield fell to a 15-month low of 3.603%. Strength in European government bonds today is providing carryover support to T-notes. Also, today’s slide in stocks has boosted safe-haven demand for T-notes.
T-notes fell back from their best levels after the US Aug core CPI rose +3.2% y/y, right on expectations but well above the Fed’s 2.0% price target. The core CPI report knocked the chances of a 50 bp rate cut at next week’s FOMC meeting down to 17% from 50% last Friday. Supply pressures are also negative for T-notes as the Treasury will auction $39 billion 10-year T-notes later today. Losses in T-notes are limited due to carryover support from
European government bond yields today are moving lower. The 10-year German bund yield fell to a 5-week low of 2.092% and is down -3.8 bp at 2.093%. The 10-year UK gilt fell to a 5-week low of 3.745% and is down -7.1 bp at 3.748%.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 100% for the September 12 meeting.
US Stock Movers
Bank stocks are under pressure for a second day after JPMorgan Chase President Pinto said Tuesday that analysts are too optimistic in projecting next year's expenses and net interest income. As a result, Discover Financial Services is down more than -4%. Also, Capital One Financial , Regions Financial , Citizens Financial Group , Cincinnati Financial Corp , and M&T Bank are down more than -3%.
Health insurance stocks with Medicare Advantage plans are falling for a second day after Leerink Partners published a report Tuesday that said those plans might have a tougher time earning high-quality “star ratings” that drive bonus payments. As a result, Humana is down more than -5% to lead losers in the S&P 500, and UnitedHealth Group is down more than -2% to lead losers in the Dow Jones Industrials. Also, CVS Health Corp is down more than -3%, and Elevance Health is down more than -1%.
Albemarle is up more than +8% to lead gainers in the S&P 500 as lithium stocks rallied after UBS said CATL curtailed lithium production at its Jiangxi operation.
Starbucks is up more than +1% to lead gainers in the Nasdaq 100 after CEO Niccol said he is open to exploring a new joint venture partnership structure in China.
Trump Media & Technology is down more than -14% following last night’s Harris-Trump debate, as the odds on the betting website PredictIt of Vice President Harris winning the presidency rose to 56% from 53% before the debate.
GameStop is down more than -16% after reporting Q2 net sales of $798.3 million, weaker than the consensus of $895.5 million.
Palantir Technologies is down more than -2% after a trading update showed exchange-traded funds managed by Cathie Wood’s Ark Investment Management sold 124,626 shares of Palantir.
Rollins Inc is down more than -4% on negative carryover from a -20% plunge in peer Rentokil after it issued a surprise downgrade to its full-year growth estimates.
Morgan Stanley is down more than -1% after Goldman Sachs downgraded the stock to neutral from buy.
Viridian Therapeutics is up more than +8% after Needham & Co. raised its price target on the stock to $48 from $30.
AES Corp is up more than +4% after Jeffries initiated coverage on the stock with a recommendation of buy and a price target of $20.
Viking Therapeutics is up more than +7% after JPMorgan Chase initiated coverage on the stock with a recommendation of overweight and a price target of $80.
William-Sonoma is up more than +1% after Jeffries upgraded the stock to buy from hold with a price target of $156.
Earnings Reports (9/11/2024)
Designer Brands Inc (DBI), Oxford Industries Inc (OXM), Vera Bradley Inc (VRA).
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.
Shares of Ally Financial Inc. ALLY lost 17.6% in Tuesday’s trading, touching its lowest level since January, after the company warned of “intensifying credit challenges” in the current quarter.
ALLY’s CFO, Russ Hutchinson, said at the Barclays Global Financial Services Conference in New York, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.”
Ally Financial’s Key Problem Area
Retail auto loans have become a significant area of concern for ALLY.
Since borrowers continue to struggle with inflation issues and the high interest rate environment, the demand for car loans has come down. As the cost of living increases, people find it difficult to repay their loans.
Thus, Ally Financial is witnessing an increase in delinquencies in its retail auto-loan business.
In July and August, ALLY’s delinquencies rose about 20 basis points above what was expected. Also, its net charge-offs (debts that are not likely to be recovered) in the retail auto business were 10 basis points higher than expectations in these two months.
Hutchinson said that the company’s net charge-off rate will likely increase further in the coming months (especially in the 61-plus-day delinquency bucket) because of the large number of borrowers who are struggling amid the weakening economic outlook.
Sale of ALLY’s Lending Business to Synchrony
To address the credit issue, Ally Financial sold its point-of-sale (POS) financing business — Ally Lending (which included $2.2 billion of loan receivables as of Dec. 31, 2023) — to Synchrony SYF in March 2024.
The deal was announced this January. At that time, ALLY expected the divestiture to bolster its Common Equity Tier 1 (CET1) ratio by almost 15 basis points at closing. Also, the deal is projected to be modestly accretive to tangible book value and earnings per share this year.
Under the terms of the transaction, Ally Financial’s relationships with almost 2,500 merchant locations and support to more than 450,000 active borrowers in home improvement services and healthcare got transferred to SYF.
The move reflected ALLY's commitment to optimizing its capital allocation and prioritizing resources toward high-growth areas. For Ally Financial, the transaction was part of a broader initiative to invest resources in growing scale businesses and strengthen relationships with dealer customers and consumers.
ALLY has been undertaking steps to bolster profitability amid a challenging operating backdrop. In 2023, the company trimmed its headcount, leading to $80 million of annualized expense savings. Further, the deconsolidation of $1.7 billion worth of seasoned retail auto loans resulted in 9 bps of CET1 benefit.
ALLY’s Price Performance & Zacks Rank
In the past six months, ALLY shares have lost 14.3% (the drop is because of yesterday’s slump) against the industry’s growth of 3.4%.
However, the company is well poised for top-line growth given the high interest-rate environment and its efforts to diversify revenues. Ally Financial expanded into the mortgage business, which supports its earnings. Also, the company has been making efforts to enhance digital offerings and introduce new products to boost profitability. Its wealth management and online brokerage initiatives related to credit card offerings remain impressive.
Currently, Ally Financial sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Another consumer loan provider with a favorable Zacks Rank is EZCORP, Inc. EZPW. EZPW also sports a Zacks Rank of 1 at present. Over the past 60 days, the Zacks Consensus Estimate for the company’s current fiscal-year earnings has been revised 1.8% upward. In the past six months, EZCORP shares have gained 4.1%.
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