Auto Lenders Are on a Bad Trip

Warning signs continue to accumulate in the auto-finance industry

Cars for sale at a California Toyota dealership. Prices of used vehicles are sliding.PHOTO: MARIO ANZUONI/REUTERS

By Aaron Back

The auto-finance sector has taken a bad turn. An investor update on Tuesday from auto lender Ally Financial, formerly the auto-lending arm of General Motors, added to building evidence that trend lines are negative in the industry.That ranges from rising defaults to falling used-car prices.

Ally said Tuesday that it now expects growth of between 5% and 15% in adjusted earnings per share this year. This amounts to a soft downgrade in its forecast since, at the end of January, the company predicted 2017 adjusted EPS growth of up to 15%.
One culprit was an accelerating decline in used-car prices. This makes leases less profitable by lowering the residual value of a car when its lease ends. A lender must estimate the eventual price and any error, whether negative or positive, can have a significant effect on its return.

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