According to the latest data out of auto lender Ally Financial, the auto lending segment seems to be encountering some engine trouble — brought on largely by rising defaults and falling used car prices.
Ally offered what amounted to a soft downgrade for its yearly growth estimate — as of earlier this week, the firm is expecting growth to clock in between 5 percent and 15 percent in adjusted earnings in 2017. That is a bit of a softening of a January estimate that predicted growth would clock in at up to a 15 percent rate.
Driving the troubles is a drop-off in the price of used-cars — this, in turn, makes leasing less profitable, since cars turned over at the end of a lease period now have less residual value to offer. Among factors pushing down price: a higher supply of used cars hitting the market, better sales incentives for new vehicles and even delays in tax-refund checks have all contributed to the problem.
The National Automobile Dealers Association indicates that its used-car price index has dropped 8 percent from a year ago and now sits at its lowest level in seven years.
Pairing in a less than savory way with pricing problems is data out of Ally that indicates that sub-prime and near-prime auto loan defaults are on the upswing.
Ally also said on Tuesday that defaults on auto loans are on the rise in lower credit tiers, though prime borrowers are still in good shape.
Ally makes about one third of its loans to borrowers with FICO scores south of 660 — Credit Acceptance Corp., on the other hand, makes nearly all its consumer auto loans to this group. Their difference in share price outcome at present, then, is perhaps instructive — Ally’s shares are up about 8 percent on the year, while CCA has been a popular target for short sellers and is down about 8 percent.
The concern now among market watchers is whether investors will be spooked by the emerging weak points in the auto segment — and whether that weakness will have them searching for an off-ramp.