Ally/Warren Buffett: auto loan stake signals confidence in consumer credit

It does not have quite the same lustre as the Golden Age of Athens. But 2020-21 will be remembered as halcyon days by US used car merchants if no one else.

Warren Buffett does not think the good times are quite over. Filings show Berkshire Hathaway tripled its stake in Ally Financial, an auto lending mainstay, to $1bn during the second quarter.

The world’s most famous investor evidently believes lending margins will remain robust and default rates low in consumer credit.

In the two pandemic years, shares in Ally rallied 57 per cent. The stock was buoyed by consumers flush with cash flocking to buy used vehicles. Auto manufacturers were unable to meet demand for new cars.

Ally shares, have fallen by a quarter so far in 2022. Wall Street is worried about the finances of the US consumer as well as a normalisation in the auto market. Ally says those worries remain overstated, a view that now has the implicit endorsement of a legendary investor.

Between the end of the 2019 and the start of 2022, the Manheim Used Vehicle Value Index increased by a vertiginous 70 per cent. Higher used car prices supported bigger loans at a time when there were virtually no concerns about immediate credit losses.

Net interest revenue increased substantially in the current quarter, compared with 2021. However, Ally was forced to accrue credit loss provisions so big that pre-tax income fell 40 per cent year on year. The company insists those provisions are simply a natural reversion to ordinary levels.

Ally’s internal models forecast used car prices falling by 30 per cent over the next couple of years. Still, lower prices are not a death knell and could lead to even steeper volumes of sales to buyers sidelined by elevated prices, according to Ally.

The company’s share price has fallen far enough to trade at near book value. This must have grabbed Berkshire’s attention. Buffett’s bet is a vote of confidence in consumer banking broadly, as well as auto loans.