UPDATE: This article includes details from the company's chief financial officer during an interview with American Banker and comments from analysts.
Ally Financial, after struggling with loans it made during the pandemic-era auto boom, appears to be finally turning the corner as it starts 2025.
The progress is partly due to improvements in the health of its bread-and-butter auto loans, which were faltering last year but are now stabilizing.
But it also involved Ally abandoning its ambitions to lend in spaces beyond the auto industry, marking a return to its roots for a company once spun off from General Motors. Ally will soon stop making new mortgage loans, and it said Wednesday it sold its credit card business after a brief foray into the sector.
"These actions simplify and streamline the company," said CEO Michael Rhodes, who joined the company in April of last year. He said the path toward higher profitability is through the "power of focus."
Ally has agreed to sell the credit card business to the fintech firm Cardworks, which also owns the $3 billion-asset Merrick Bank, in a deal expected to close this year.
Investors cheered Ally's earnings report, driving up its stock price by 6% at the open before retracing those gains a bit. The stock had been hammered last year when signs of credit troubles popped up.
"There was a real fear that it was just going to keep going," said Brian Foran, an analyst at Truist Securities, but the improved outlook signals the company may have hit "peak losses." Losses ticked up slightly again in the fourth quarter, with net charge-offs on its retail auto loans increasing to an annualized rate of 2.34%, from 2.21% a year earlier. But Ally executives said they expect that figure to be between 2% and 2.25% this year, an improvement from earlier guidance that losses would be closer to 2.3%.
Loan delinquencies showed encouraging trends, indicating fewer borrowers are suddenly late on their payments. Late payments of 30 days or more ticked down to 4.39% of loans in the quarter, compared with 4.42% in the same quarter a year earlier. Delinquencies of 60 or more days also fell by a similar amount.
The results showed "discipline and improvement," easing concerns that its loan losses would get worse, Jefferies analyst John Hecht wrote in a note to clients.
A presentation to investors also signaled the company should see lower losses over time as loans it made in 2022 and 2023 roll off its balance sheet.
The older loans have driven Ally's credit problems, as the company made them when used auto prices were near record highs and inflated borrowers' car payments. Ally executives have also routinely tightened their underwriting criteria over time.
The quality of the more recent loans has held up much better, Ally indicated in its presentation. The company has seen a 1.72% delinquency rate on loans it booked this year, compared with 2.23% for the same time period in 2023 and 2.45% for 2022 loans.
"Delinquencies continue to be elevated, but we saw real improvement," Ally Chief Financial Officer Russ Hutchinson told American Banker.
Factors that helped reduce losses include shifts in how the company handles troubled borrowers. Ally has improved its outreach to borrowers who are showing strains and is giving debt collectors more time before repossessing vehicles.
Those changes lead to better outcomes all around, Hutchinson said, as they "keep people in their cars longer" and ultimately help Ally collect more by avoiding repos — where lenders take a hit on how much they get back.
"Based on what we're seeing, we don't think we're kicking the can down the road," Hutchinson said, addressing concerns that the company is merely delaying its losses by being more flexible.
Lower losses helped boost Ally's bottom line, as the company recorded $108 million in net income during the quarter, up 74% from $62 million in the same quarter last year. Per-share earnings were 26 cents, up from 11 cents a year ago. Analysts polled by S&P had expected 55 cents a share, on par with Ally's third-quarter earnings.
The company also recorded $22 million in costs tied to its recent restructuring. The company said this month it was laying off less than 5% of its staff as it halted its mortgage lending and evaluated a credit card sale.
Some investors had been skeptical of the expansion to credit cards. Keith Horowitz, a Citi analyst, said he saw the sale as "welcome news," since it allows Ally to focus on its core businesses.
The exit from credit cards is particularly abrupt, since Ally bought the business it's selling at the end of 2021. The buyer for the business, Cardworks, is a company that Ally had tried to acquire in 2020 in its quest to add a credit card offering. Both companies called off the deal during the COVID-19 pandemic.
The sale includes Ally's $2.3 billion credit card loan portfolio and some 1.3 million cardholders.
Ally's pivots aren't a result of its struggles last year in auto-loan quality, Hutchinson said, instead referring to them as "long-term strategic decisions" that better align the business with its strengths.
In addition to its consumer auto portfolio, the company offers loans to auto dealers and other non-auto corporations. It also offers auto insurance and has built a large deposit franchise through its online bank.
The company is focusing on areas "we have competitive advantage, we have relevant scale, and where we have a track record, where we've proven we can win," Hutchinson said.
Truist's Foran said it's an example of lenders finding that effectively cross-selling new products to existing customers is "really difficult to do." Discover Financial Services, the credit card heavyweight, rid itself of a mortgage business it bought years ago after coming to that realization.
Turning a deposit customer into a borrower can be tricky, he said, because some may view those products as "distinct individual relationships" with a bank.
"They can be good, efficient individual products, but cross-selling any further products into those customer bases hasn't really worked for Ally or others," Foran said.
