Ally Financial's Credit Woes Deepen: Rising Delinquencies

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Ally Financial (NYSE: ALLY) faced a steep decline as its Chief Financial Officer, Russ Hutchinson, highlighted worsening conditions within its auto loan portfolio. Rising delinquencies, heightened net charge-offs, and the ongoing struggles of its typical borrower amid a challenging economic environment have weighed heavily on investor sentiment, leading to a significant drop in the company’s stock.

Auto Loan Portfolio Challenges
Ally Financial's core business, particularly its auto loan segment, is under pressure as consumers grapple with inflation, high living costs, and a softening job market. Hutchinson pointed out that delinquencies in July and August were about 20 basis points higher than expected, while net charge-offs — loans deemed uncollectible — were 10 basis points above projections. These metrics reflect a broader trend of deteriorating consumer credit quality, signaling that many borrowers are struggling to keep up with their payments.

Hutchinson further noted that the issue isn't just a short-term hiccup; Ally anticipates net charge-offs to continue rising in the months ahead. The company’s analysis indicates a growing pool of borrowers with payments more than two months past due, underscoring the persistent nature of the credit issues.

Broader Economic Pressures
The struggles of Ally’s borrowers mirror larger economic pressures. The typical Ally borrower is increasingly burdened by inflation, elevated costs of living, and recent signs of a weakening employment landscape. This scenario has prompted Ally to adjust its expectations, raising concerns that these challenges could persist longer than initially anticipated.

Strategic Response: Reducing Exposure
In response to its mounting credit challenges, Ally has taken steps to reduce exposure. Earlier this year, the company sold its Ally Lending arm to Synchrony Financial (SYF), including loan receivables worth $2.2 billion. While this move was designed to bolster its balance sheet, the persistent issues within its core auto loan portfolio suggest that Ally’s financial health remains a concern.

Net Interest Margin Under Pressure
Adding to the pressure, Ally expects its net interest margin — a key indicator of profitability for lenders — to contract in the third quarter. With interest rates expected to remain elevated, the squeeze on net interest income presents another headwind for the bank. This shift marks a notable deviation from the expansionary trends observed in previous quarters, reflecting the increasingly tough lending environment.

Technical Analysis
Ally's stock plunged 17.67% on Tuesday, hitting its lowest level since January, reflecting investor anxiety over the company's credit outlook. However, the stock saw a slight recovery in premarket trading on Wednesday, up 0.12%, hinting at a potential short-term bounce. Despite this, the technical indicators suggest that the overall outlook remains bearish.

RSI and Oversold Conditions
The Relative Strength Index (RSI) currently stands at 35, indicating that Ally is in oversold territory. An RSI below 30 often signals that a stock is undervalued, and a reversal could be on the horizon. While Ally’s RSI isn’t quite there yet, it does point to increased selling pressure, which has pushed the stock to near critical support levels.

Bullish Flag Pattern Falters
On the chart, Ally recently formed a bullish flag pattern — typically a continuation signal for an upward trend. However, the pattern failed to materialize fully, with the stock unable to break above key resistance levels, indicating a lack of buying momentum. The failed breakout suggests that investors remain cautious, waiting for more concrete signs of improvement in the company’s fundamentals.

Key Support and Resistance Levels
Ally's stock is approaching critical support near the $25 mark, a level that has historically provided a floor for the price. A breach below this point could trigger further downside, with the next major support at around $22. Conversely, resistance lies at the $30 level, and a sustained move above this point would be needed to shift the technical outlook back to neutral.

Conclusion
Ally Financial (ALLY) faces a challenging road ahead as it grapples with rising delinquencies, tightening credit conditions, and macroeconomic pressures weighing on its borrowers. While technical indicators show that the stock is oversold, signaling potential for a short-term bounce, the broader fundamentals suggest a cautious approach. Investors will be closely monitoring how the company navigates its credit challenges in the coming quarters, particularly as the Federal Reserve’s rate policy continues to evolve.

For now, Ally (ALLY) remains under pressure, and while strategic steps like selling its lending arm provide some relief, the path to recovery will depend on broader economic improvements and a stabilization in consumer credit quality.