Pros And Cons From Ally Financial's Q3 Performance

Citi cut its EPS estimates on Ally Financial Inc (NYSE: ALLY) as heightened net charge-offs (NCOs), provision pressure and increasing costs offset improving NIM, strong deposit growth and higher retail auto loan yields in the third quarter.

The brokerage cut the estimate to $2.18 from $2.26 to reflect the third-quarter miss and higher provision. Citi also slashed its 2017/2018 estimates to $2.55 and $2.70 from $2.58 and $2.73, as it assumes higher credit losses and provision.

Ally Financial, one of the largest non-captive auto lenders, reported third-quarter adj. EPS of $0.56, below Citi’s $0.60 estimate and consensus $0.59.

Net revenues of $1.384 billion beat Citi’s $1.362 billion on better net interest margin (NIM) and other revenues. NIM (ex-OID) was 2.73 percent, but it is expected to be down seasonally in the fourth quarter.

Meanwhile, provision expense came in at $258 million higher than Citi’s $227 million and consensus estimate of $236 million.

“Auto continues to be an out of favor sector given competition and softer used car pricing. ALLY cited used car values, down 5–6 percent y/y in their lease book, have likely reached and inflection point to turn lower,” analyst Donald Fandetti wrote in a note.

The third-quarter originations came in at $9.3 billion and the total auto portfolio (commercial, loan + lease) stands at $112.5 billion. Ally’s auto loan NCO rate for the quarter was 1.37 percent, up from 1.01 percent y/y on lower recoveries on softer used car pricing. Auto loan delinquencies were up 21 bps year-over-year to 2.81 percent.

Meanwhile, Fandetti reiterated its Buy rating on Ally shares given the valuation and healthy capital return.

The analyst has a price target of $22, implying potential return of 12.5 percent, while the shares closed Wednesday’s trading at $18.81.