Ally Financial Issues Profit Warning Over Used Car Prices: Jamie Dimon Says “It’s Not Systemic”

A supply glut of used cars coupled with subprime lending finally came to the forefront with a Profit Warning From Ally Financial.

Ally Financial Inc. warned profit may grow less than anticipated only a few months ago, the latest sign that automakers’ heavy discounting and aggressive use of leasing to boost sales has created a supply glut hurting lenders and rental-car companies.

Earnings may increase as little as 5 percent this year, Ally said Tuesday, after Chief Executive Officer Jeffrey Brown in January predicted growth “shy of 15 percent but still very solid.” The caution raised by the Detroit-based company dragged on shares of rental companies and auto dealer groups including Hertz Global Holdings Inc. and AutoNation Inc.

Steeper Slide

While Ally had expected a 5 percent drop in used-car prices in the near term, the lender saw a 7 percent slide in the first quarter, which could cost $15 million to $20 million, Halmy said during a Tuesday conference call with analysts.

“Used-vehicle prices continue to decline at a manageable rate, but a bit higher than last year’s pace,” he said. “We do expect the used-car market to rebound more in the second quarter.”

“Auto we think is going to slow down because people will stress on credit,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co., said at the company’s investor day on Feb. 28. “You’re going to see some issues there, but it’s not systemic.”

Used Cars Threatens Ford Profits

Also in the not systemic category, we note that a Rising Tide of Used Cars Threatens Ford’s Profits.

(Click on image to enlarge)

A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.

“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.

Cheaper Payments

New vehicle sales have jumped each of the last seven years, the longest period since at least the days of the Model T. When used car values were strong, it enabled automakers to offer consumers cheaper lease payments.

Leasing has helped consumers afford new vehicles becoming more expensive than ever. Prices have climbed 13 percent to $34,067 over the past five years, according to Edmunds.com, a rise partially driven by booming popularity of pricier trucks and sport utility vehicles.

The question for auto companies is whether pulling those levers will offset any losses from overlooking the true cost of using hefty incentives and discounted leases to boost new-vehicle sales.

“That’s just the game they play,” Keller said. “It’s deferring the loss, but those losses are now coming home to roost.”

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