Ally Financial stock dropped after the lender said that higher revenue from financing was offset by expenses in the first quarter.
The digital bank reported adjusted earnings per share of $2.03 in the first quarter, slightly higher than the $1.93 expected, according to analysts surveyed by FactSet. For the quarter ended in March, net income, excluding any preferred dividends, was $627 billion, lower than the $658.3 million expected by analysts. A year earlier the company reported $796 million in profits.
The bank, which services consumers, businesses, and automotive dealers, ascribed the drop in profits to "higher provision for credit losses, higher noninterest expenses and lower other revenue," which more than offset higher net financing revenue. Provision for credit losses is the amount set aside by a company to cover potential losses. This is treated as an expense on the balance sheet of banks.
Ally stock (ticker: ALLY) was down about 6%, at $40.97, in recent trading, while the S&P 500 was down 0.9%. Shares are down 14% year to date.
RBC Capital Markets analyst Jon Arfstrom called it "a decent quarter." The company "exceeded somewhat low expectations [by the Street] given concerns abound consumer financial health and auto trends," he noted pointing to the EPS beat. Prices for goods and service s surged to more than 11% year over year in March, while some used-car prices now exceed new-car prices.
That said, Ally expects to deliver 16% to 18% return on tangible common equity—a measure of profitability—for 2022 and in the medium term. The company gave the same outlook in January in its fourth-quarter earnings. In the first quarter, it delivered 23.6%
Arfstrom said continued strong guidance is important for Ally, given the negative sentiment around auto lending. He also highlighted the increase of the bank's net margin—the difference between the rates at which banks borrow and lend—of 3.93% in the quarter, 77 basis points higher from the year-ago quarter. (A basis point is 1/100th of a percentage point.)
"The margin outlook is also important with the aggressive rate hike expectations and overall questions on funding costs," he said. Arfstrom rates the stock at Outperform and has a $43.37 price target. On average, analysts rate the stock at Buy with a $61.20 price target.