Dive Brief:

• Shares of lender Ally Financial dropped after CFO Russ Hutchinson highlighted “intensified” credit challenges for the digital financial services provider.
• The CFO pointed specifically to rockiness in the lender’s retail automotive loans segment, which has increased over the past quarter, during a talk at the Barclays Global Financial Services conference Tuesday. Shares of the lender fell by nearly 18% following his remarks, according to a MarketWatch report.
• The intensified credit issues come as Ally’s borrowers struggle with “high inflation and cost of living, and now more recently, a weakening employment picture,” Hutchinson said.

Dive Insight:

Though the Federal Reserve has made progress bringing inflation near to its 2% goal, consumers and small businesses remain impacted by the effects of high prices. Inflation persisted as the top concern for small businesses last month amid weakening sales forecasts and rising costs, according to the results of a National Federation of Independent Businesses survey previously reported by CFO Dive.

Consumer confidence, meanwhile, has inched downwards in recent months, with pricing pressures and shifts in the labor market leading to weaker spending.

While the Charlotte, North Carolina-based Ally is seeing other credit segments perform either at or exceeding its expectations, delinquencies in its retail auto sector rose by 20 basis points versus its expectations in July and August, Hutchinson said Tuesday.

Net charge-offs for the two-month period were also higher than expected, he said, comments which follow after Ally increased its expectations for bad debts in 2024 for its last quarter. NCOs — the ratio between gross charge-offs and delinquency recovery — represent debts owed that are unlikely to be recovered by the company, according to an Investopedia report. In Ally increased its retail auto NCO to 2.1% in July, from its previous 2.0% guide in April, according to its Q2 earnings report.

In response to higher than expected NCOs in its last quarter, Ally also increased its provision for credit losses to $30 billion.

“We’re clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that’s worse,” Hutchinson said.

While the unemployment rate held relatively flat last month at 4.2%, layoffs in industries such as automotive and technology have been increasing, contributing to shifting trends in the labor market for employees. Technology layoffs hit their highest monthly level in August since January, CFO Dive previously reported.

In looking to mitigate its credit challenges, Ally has adjusted its outlook on retail loan credit several times over the past year, Hutchinson said.

“We try to provide a lot of transparency around credit, even quite frankly when it highlights some of the difficulties we have in forecasting credit,” he said Tuesday.

The company’s management team has also taken several steps over the last 18 months to help boost Ally’s profitability, he said, including the sale of the company’s Ally Lending business to Synchrony Financial in March.

“We’ve taken a lot of actions in terms of cutting out segments that are underperforming, while at the same time repricing segments we’ve stayed in,” Hutchinson said, a strategy Ally plans to continue.