The bank warned that its borrowers are under pressure.
A top executive from Ally Financial (ALLY -17.68%) sounded the alarm on the state of the U.S. consumer during a financial conference Tuesday, and investors heeded the warning, sending Ally’s shares down by 17.7% as of 2 p.m. ET.
Borrowers are struggling
Ally is a consumer-focused online bank with significant exposure to auto loans. It was once the lending arm of General Motors, but has been an independent company since 2008. The bank has a lot of exposure to consumer lending, and the stock tends to be volatile when there are concerns about the health of the economy. On Tuesday, Chief Financial Officer Russ Hutchinson made comments during an investor conference that put investors on watch.
Speaking at the Barclays Global Financial Services Conference, Hutchinson warned that credit challenges are intensifying and said these conditions could lead to Ally underperforming in the quarters to come.
“Our borrower is struggling with high inflation and cost of living and now, more recently, a weakening employment picture,” Hutchinson said, according to media reports.
Is Ally stock a buy?
Based on Hutchinson’s comments, investors should expect Ally to consider boosting its reserves to cover bad loans. That would impact earnings and could cause Ally to lower its guidance.
The good news is that Ally is healthy, and while its earnings could take a hit as it sets aside more funds to cover potential loan defaults, there’s nothing to suggest these potential issues could cause it to capsize. Lenders’ fortunes tend to ebb and flow along with the economy, and what Ally is experiencing is a natural part of the business cycle that a well-managed bank can handle.
At its current share price, Ally offers a dividend yield of over 3.5%. For those who have the stomach to wait out what could be a period of intense volatility up ahead, Tuesday’s stock drop could be a buying opportunity.
Ally is an advertising partner of The Ascent, a Motley Fool company. Lou Whiteman has positions in Ally Financial. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
