share of Allied Finance (Ally 16.36%) They have lost about half of their value over the past year as investors worry that its automotive-heavy debt portfolio will be hit hard by macroeconomic trends. On Friday, the company reported results that suggested it was holding up much better than anyone expected, and its share price rose. As of 10:45 a.m. ET, the stock was up about 15.6%.
Automotive lending runs deep in Ally Financial’s roots. The bank was established over a century ago as a lending arm General motor. In 2006 the automaker sold a majority stake in the business, then known as GMAC, and the two split completely during the financial crisis, with GMAC adopting the Ally name in 2009.
But auto loans still make up a significant portion of Ally’s loan book. This has become a concern for investors in 2022 as rising interest rates and falling used car prices increase the risk level on Ally’s balance sheet.
The company’s fourth-quarter earnings report helped put some of those fears to rest. Ally earned $1.08 per share on revenue of $2.2 billion, beating analysts’ consensus expectations for $1 per share on sales of $2.05 billion. Mitra appears to be doing a good job pricing its debt in a rising interest rate environment. It produced an estimated retail auto originated yield of 9.57% in the quarter, up 260 basis points year over year.
Ally was also helped by its insurance operations, which generated pre-tax income of $101 million in the quarter, compared with a loss of $30 million in the third quarter.
“Ally continues its strategic evolution in 2022 while navigating a fluid macroeconomic environment,” CEO Jeffrey J. Brown said in a statement. “Optimization across our business was evident in our ability to generate record net interest margins and total revenue. We continue to expand our customer base, now 11 million strong, as our customer-centric products resonate in the market.”
The operating environment remains difficult for Ally. Brown said the bank is constantly assessing the macroeconomic backdrop and making adjustments accordingly. Ally’s consumer auto loan originations fell to $9.2 billion from $10.9 billion year-over-year in the quarter, and the bank’s provision for credit losses rose $376 million to account for additional stress on consumers.
Investors should be aware that things can get worse before they get better.
These latest results, however, are an indication that Ally has weathered the storm, and is making steady progress in diversifying its balance sheet. Ally’s mortgage, credit card and other non-auto lending portfolios have grown at a compounded rate of 26% since 2014, from $5.4 billion to $33.4 billion. While that debt is not risk-free, the company’s overall risk profile is evolving.
Ally’s rocky road may continue until 2023, but for long-term-focused investors, it looks like the lender is on the right track.
Ally is the advertising partner of The Ascent, a Motley Fool company. Lou Whiteman holds positions at Ally Financial. Motley Fool has no position in any of the stocks mentioned. Motley Fool has a revealing policy.