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 CEO Jeffrey Brown in January predicted growth “shy of 15 percent but still very solid.” The caution raised by the company dragged on shares of rental companies and auto dealer groups including Hertz Global Holdings Inc. and AutoNation Inc.
Concern is mounting over falling used-car values dragging on lenders including Ford Motor Co.’s financial-services unit. Consumers have turned to leasing more than ever to lower their monthly payments on new vehicles that have been selling at record high prices in the U.S. Surging numbers of vehicles coming off leases is fueling a supply glut and dragging down prices.
The National Automobile Dealers Association’s Used Car Guide index declined 3.8 percent in February, the eighth consecutive drop and the steepest since November 2008.
“We’ve seen a pretty dramatic move in 2016” and “we think that continues,” Chris Halmy, Ally’s CFO, said in reference to the company’s expectation used-car prices will drop by about 5 percent in 2017, similar with last year.
Ally shares fell 2.89 percent to close at $20.51 in New York trading on Tuesday. Shares dropped 8.75 percent to close at $19.40 at Hertz and 7.79 percent at $29.54 at Avis Budget Group Inc. The share prices of dealer groups including AutoNation and Penske Automotive also dropped on an overall down day on Wall Street.
Used-car price declines can force auto lenders to boost provisions against future losses, since the collateral on their loans is becoming less valuable. Falling vehicle values also reduce the amounts finance companies can recover on repossessed cars.