Ally Financial tightens underwriting as originations slow

Ally Financial tightened its underwriting guidelines in the first quarter, slowing origination volume as the lender prepares for continued increases in delinquencies.

The bank increased auto pricing across all credit tiers late in Q1 when compared with January 2022, interim Chief Financial Officer Brad Brown said on Wednesday’s earnings call.

S-tier loan pricing was up 310 basis points (bps) since January 2022, while A-tier loan pricing increased 435 bps, according to the earnings supplement. B-tier loan pricing, meanwhile, jumped 710 bps compared with January 2022.

Origination volume dropped 18.1% year over year to $9.5 billion off an 11-year quarterly record of $11.6 billion but ticked up 3.4% sequentially. Estimated yield on loans originated in Q1 clocked in at 10.9%, up from 9.6% last quarter and 7.1% a year ago, according to the earnings supplement.

Loan approval rates dropped to 31% of 3.3 million applications, down from 33% of 2.9 million applications in Q4 2022 and 34% of 3.2 million applications in Q1 2022.

Average retail auto yields jumped to 8.49%, up from 7.98% in Q4 2022 and 6.61% in Q1 2022, while auto lease yields inched up 82 bps sequentially to 6.84% but dropped 12 bps YoY.

“We expect yields will migrate toward 9% as we exit 2023,” Brown said, noting the lender expects to originate in the “low $40 billion range” this year, driven by tightened underwriting.

“Our retail auto pricing and origination strategies continue to drive current earnings asset yields higher and will generate significant tailwind in future periods,” Brown said. “We’ve added a significant price across the entirety of the credit spectrum, but our pricing action has been very targeted.

“Most of our first-quarter price actions occurred near the end of the quarter, limiting their impact on first-quarter results, so it will become more meaningful in the second quarter in lower credit tiers as we continue to increase our selectivity as well as our risk pricing premium,” Brown said.

Loan and lease outstandings came in at $94.2 billion, nearly flat from the prior quarter and up 4.7% YoY.

Delinquencies, NCO increase YoY

Auto delinquencies and net charge-offs (NCO) continued to tick up, but loss rates remained “favorable versus pre-pandemic levels given the strategic actions we’ve taken across servicing and collections, which include digital outreach and repo timing updates,” Brown said.

Retail auto NCOs rose 2 bps sequentially and 110 bps YoY to 1.68%, according to the earnings supplement.

Retail auto delinquencies, meanwhile, posted sequential declines but YoY increases as tax season cure rates were lower than expected based on historical levels. Accounts 30 days past due landed at 3.24%, down 32 bps on a linked-quarter basis but up 122 bps YoY. Accounts 60 days delinquent came in at 0.8%, down 9 bps sequentially but up 34 bps YoY.

“Typical seasonality was impacted by lower tax refund benefits,” Brown said, noting “60-day delinquencies reflected similar trends but also reflect our strategic shift in collection practices to provide more time to work with customers and avoiding repossession, which has led to favorable flow to loss rates. We expect increases in delinquencies and continue to monitor the cumulative impact of inflation on consumers.”

Still, retail auto reserves were flat QoQ at a 3.6% coverage ratio, or $3 billion. That’s an increase from a 3.49% coverage ratio in Q1 2022.

Shares of Ally Financial [NYSE: ALLY] were trading at $27.45 Wednesday at market close in New York, up 2.2% from market open. Ally has a market capitalization of $8.26 billion.

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