Ally Financial (ALLY) Slides As Q3 Earnings Miss Estimates

Shares of Ally Financial Inc. (NYSE:ALLY) declined nearly 3.8% following the company’s release of a negative earnings surprise of 5.1% in the third quarter of 2016. Adjusted earnings of 56 cents per share lagged the Zacks Consensus Estimate of 59 cents. However, the figure improved 9.8% from the prior-year quarter.

Lower-than-expected results were primarily due to escalated expenses and provisions for loan losses. Further, deteriorated credit quality and capital ratios added to the woes. Nonetheless, improved net revenues were on the positive side.

Ally Financial’s net income for the quarter fell 22% year over year to $209 million.

Higher Revenues Fail to Offset Expense Pressure

Total net revenue climbed nearly 6.3% year over year to $1.38 billion owing to a rise in net finance revenue and total other revenue. Moreover, the figure surpassed the Zacks Consensus Estimate of $1.37 billion.

Controllable expenses came in at $479 million, up nearly 6% from the prior-year quarter. Further, other non-interest expenses increased 15.3% year over year to $256 million.

Credit Quality Deteriorates

Non-performing loans of $753 million were up 18.2% year over year. Moreover, provision for loan losses surged 22.3% year over year to $258 million.

Balance Sheet Strengthens, Capital Ratios Decline

Total finance receivables and loans amounted to $113.8 billion as of Sep 30, 2016, compared with $111.6 billion as of Jun 30, 2016. Further, deposits totaled $75.7 billion, up from $72.8 billion as of Jun 30, 2016.

As of Sep 30, 2016, total capital ratio came in at 12.8%, down from 12.9% at the end of the prior-year quarter. Tier I capital ratio was 11.1%, compared with 12.0% as of Sep 30, 2015.

Our Take

We believe that Ally Financial’s acquisition of TradeKing in Jun 2016 is likely to assist in improving product offerings and digitization of financial operations, which will further help in diversifying its revenue base and support bottom-line growth. Also growth in net financing revenue remains a positive for Ally Financial.

However, high debt levels may restrain the company’s ability to procure additional funds for working capital, acquisitions or other purposes. This may also negatively impact the company’s access to liquidity and increase the borrowing costs in the unsecured market.

Currently, Ally Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Performance of Other Finance Companies

Sallie Mae (NASDAQ:SLM) reported core earnings of 12 cents per share in third-quarter 2016, outpacing the Zacks Consensus Estimate by a penny. Results were driven by increased net interest income as well as non interest income. However, these positives were partially offset by higher expenses and a significant rise in provisions.

Navient Corporation’s (NASDAQ:NAVI) third-quarter 2016 core earnings of 50 cents per share beat the Zacks Consensus Estimate of 47 cents. The results were aided by lower provision for credit losses as well as higher non-interest income. However, net interest income decreased while expenses remained stable in the quarter.

Among others, Capital One Financial Corporation (NYSE:COF) reported adjusted earnings of $2.03 per share surpassing the Zacks Consensus Estimate of $1.94. Continued improvement in net interest income and non-interest income were the primary reasons for the better-than-expected results. This was partially offset by a rise in expenses and higher provision for credit losses.

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