Auto lenders have gas in the tank

Major auto lenders such as Ally Financial ALLY 4.40%

benefit from historical conditions. Things may not be so good going forward, but it is too early to trade stocks.

At a time when other lenders struggle to maintain loan performance and growth, Ally on Tuesday posted records for quarterly income and the number of completed consumer auto loan applications. It also had the best credit performance by a key metric in its 102-year history, when it started as a credit affiliate of General Motors. Co.

, with a net gain on write-offs of 0.02 percentage point. This means that with such high salvage values ​​due to soaring car prices, she made money on written off loans.

The returns on auto leases in particular are huge right now, as vehicles are worth so much at the end of their term. Auto rentals returned 11.67% in the second quarter, up more than three percentage points from the first quarter and nearly triple their level a year ago.

The dilemma for investors now is how to normalize from here. Used car price gains will surely start to slow at some point. For now, auto lending stocks are getting somewhat cheap based on the futures price / earnings ratio, as their profits rise even as other stocks brace in better times to come – games related to futures. expenses like Visa,

Mastercard or American Express – trades at relatively high multiples. A quick return to normal could make relatively expensive stocks look good in retrospect and cheap stocks look more expensive.

Still, auto lenders like Ally might be better all-weather bets right now. For example, they would continue to benefit from a tight supply, but would not necessarily decline too much if car batches started to rack up a bit more inventory when supply chain tightening eases or demand for cars. second hand would slow down. This would stimulate the growth of dealer loans and may even encourage consumers to buy more. Spending-related stocks, meanwhile, will not have as many defensive qualities if the economic recovery is lukewarm or slowed by another wave of Covid-19 infections.

The concern in the auto industry is that high yields lead to competition and cause lenders to relax underwriting terms and lower prices. So far, however, Ally chief executive Jeffrey Brown has said that “we probably would have expected a little more competition than we see.”

Ally says he expects credit and used car price trends to begin to moderate later this year and hold until 2023. He expects typical future rental yields to be around the same. half of their current level. But the company still holds higher reserves at even more historically typical loss rates, and it has more than two percentage points of excess capital over its target minimum, leaving room for a return on capital. It has also been able to collect deposits at a faster rate since the start of the pandemic, so it is replacing more expensive liabilities with cheap digital consumer bank deposits.

That’s enough fuel for shareholders not to worry too much about being stranded for the time being.

Write to Telis demos at [email protected]

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