Ally Financial Inc. warned profit may grow less than anticipated only a few months ago, the latest sign that automakers’ heavy discounting and aggressive use of leasing to boost sales has created a supply glut hurting lenders and rental-car companies.
Earnings may increase as little as 5 percent this year, Ally said Tuesday, after Chief Executive Officer Jeffrey Brown in January predicted growth “shy of 15 percent but still very solid.” The caution raised by the Detroit-based company dragged on shares of rental companies and auto dealer groups including Hertz Global Holdings Inc. and AutoNation Inc.
Concern is mounting over falling used-car values dragging on lenders including Ford’s financial-services unit. Consumers have turned to leasing more than ever to lower their monthly payments on new vehicles that have been selling at record high prices in the U.S. Surging numbers vehicles coming off leases is fueling a supply glut and dragging down prices. The National Automobile Dealers Association’s Used Car Guide index declined 3.8 percent in February, the eighth consecutive drop and the steepest since November 2008.
“We’ve seen a pretty dramatic move in 2016” and “we think that continues,” Chris Halmy, Ally’s chief financial officer, said in reference to the company’s expectation used-car prices will drop by about 5 percent in 2017, similar with last year.
Ally slumped as much as 2.7 percent and was down 2.3 percent to $20.64 as of 12:49 p.m. in New York trading. Shares plunged as much as 10 percent for Hertz and 9.5 percent at Avis Budget Group Inc. The stocks of dealer groups including AutoNation and Penske Automotive also dropped.
Used-car price declines can force auto lenders to boost provisions against future losses, since the collateral on their loans is becoming less valuable. Falling vehicle values also reduces the amounts finance companies can recover on repossessed cars.
While Ally had expected a 5 percent drop in used-car prices in the near term, the lender saw a 7 percent slide in the first quarter, which could cost $15 million to $20 million, Halmy said during a Tuesday conference call with analysts.
“Used-vehicle prices continue to decline at a manageable rate, but a bit higher than last year’s pace,” he said. “We do expect the used-car market to rebound more in the second quarter.”
Ally shares dropped 3.8 percent last week after the company announced it would hold Tuesday’s conference call, on speculation the lender was signaling bad news to come. The company said it expects to set aside $280 million to $290 million in provisions in the first quarter, topping the $240 million average estimate of analysts surveyed by Bloomberg.
Net financing revenue will be “fairly flat” while non-interest expenses could drop to between $755 million and $765 million in the first quarter, the company said. Ally joined Santander Consumer USA Holdings Inc. in flagging signs of weakness within the subprime car loan market.
“Consumer losses have also been drifting higher, most notably in lower credit tiers,” Halmy said. “While we’re a bit more cautious on the credit side because of these dynamics, we’re still very constructive on the market as a whole.”
When companies lease out vehicles, they charge the customer a monthly payment and make an assumption of the car or truck’s value when it’s returned for resale. If autos are depreciating more than expected, losses can pile up. That’s what happened with Ford, which shaved $300 million from its financial-services arm’s 2017 profit forecast last year.
Ally’s projection for earnings-per-share growth in the range of 5 to 15 percent this year compares with an 8 percent increase for 2016.
The finance arms of Toyota, Honda, and Nissan may also see operating profit drop this year because of declining used-car values, Takaki Nakanishi, an analyst at Jefferies Group, wrote in reports last month.
“Auto we think is going to slow down because people will stress on credit,” Jamie Dimon, chief executive officer of JPMorgan Chase, said at the company’s investor day on Feb. 28. “You’re going to see some issues there, but it’s not systemic.”