Inflation, high interest rates, and rising unemployment have put considerable pressure on consumers, which has created challenges for Ally Financial.
At a New York financial conference, the bank’s Chief Financial Officer Russell Hutchinson told investors that the economic picture has forced consumers to hold off on taking out loans. Borrowers are also more likely to default, especially on car loans—delinquencies and net charge-offs rose over the past two months in Ally’s auto-loan business.
Hutchinson said Ally will continue to underperform based on the number of borrowers that are now delinquent beyond 60 days. The company expects that number to expand given the state of the U.S. economy.
Shoring Up Lending
Despite its auto-loan issues, Hutchinson said Ally’s credit card portfolio was in good shape and performing as expected, but that was only after the bank noticed elevated net charge-off rates last year and made moves to shore up its credit card lending.
Earlier this year, the company sold its point-of-sale financing portfolio to Synchrony, which includes installment loans similar to buy now, pay later. That deal included loan receivables worth $2.2 billion.
Stress Tests
Ally’s struggles were presaged by this year’s Dodd-Frank Stress Tests, also called DFAST assessments. Every year, the largest banks undergo evaluations to determine how they would respond to a significant economic event, like the pandemic, the 2008 Financial Crisis, or skyrocketing unemployment.
Ally Bank passed this year’s evaluation, but the company’s consumer-centric lending portfolio put it in jeopardy—the bank was the lowest performer in the assessment. In the event of a severe economic downturn, Ally could lose over 40% of its portfolio. Unfortunately, declining economic conditions have made the DFAST scenarios less hypothetical.
“All the economic indicators point to a tough year next year,” said Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, in a previous conversation with PaymentsJournal. “Inflation is still high, and even though interest rates are likely to decrease somewhat, they won’t drop back to where they were a few years ago. Salaries haven’t gone up as quickly as prices have, and all those factors are weighing on consumers. The takeaway is all the banks passed the stress tests this year, but next year it could get ugly.”
