Ally Financial Inc. experienced a faster decline in used-vehicle prices in the first quarter than it originally anticipated, said Chris Halmy, the company’s chief financial officer, during a financial outlook call last week. However, the company plans to stay the course and see what happens in the second quarter, as tax refunds come in, he added.
The company projected a 5% decline in used-vehicle prices, but actually experienced a 7% drop — each percentage drop represents about $50 million on an annualized basis.
“What we’re seeing really in the first quarter [is] close to 2% worse than expected on used cars,” Halmy said on the call. “So that’s driving somewhere around a $15 million to $20 million variance from our plan. Keep in mind, we do expect the used-car market to rebound more in the second quarter, and we also believe some of the used-car market can be affected by tax refunds as well.”
A 7% decline is a faster rate of depreciation than both the National Automotive Dealers Association and Kelley Blue Book reported in February — both companies had reported about a 3% to 4% decline in overall used-car values.
No matter what the rate is, declining used-vehicle values are going to continue to impact all lenders for at least another three years to come, said Tim Fleming, analyst at Kelley Blue Book.
“As to who is going to be hit the hardest? It’s everyone,” Fleming told Auto Finance News. “Certainly captives are one, banks, credit unions — anyone with portfolios of these units.”
Lenders are expecting it, though, and hopefully they have been putting away reserves to protect against a downturn, Fleming added.
To fight against declining used-vehicle prices, manufacturers and lenders will have to cut production of new vehicles, decrease leasing penetration, and reduce incentives, he explained. However, it takes time to reduce production, and incentives and leasing are showing few signs of slowing, so far.
“It’s unfortunate because there are a lot of factories and towns where people are laid off for weeks at a time when factories are slowed down to curb that production,” Fleming said. “It’s something that takes a lot of planning — you can’t just turn off a plant tomorrow if you wanted to.”
In the long term, manufacturers that are more disciplined on production and incentives are going to help themselves out in the future, he added.
“Theoretically, if production was reduced that would help reduce the need for incentives,” Fleming said. “But there is no [incentive] slowdown yet.”
