Ally shares sink most since 2014 after $2.65B subprime credit card bet
Shares of Detroit-based Ally Financial Inc. on Wednesday fell the most in nearly six years after the largest U.S. auto lender pushed into the subprime credit-card business with a $2.65 billion acquisition.
Ally agreed to buy CardWorks, a closely held lender, in a cash and stock transaction, according to a statement Tuesday after the close of regular trading. CardWorks will add $4.7 billion in assets and $2.9 billion in deposits to Ally’s franchise.
“Investors will question the purchase of a non-prime, consumer-finance portfolio this late in the cycle,” analysts at Keefe, Bruyette & Woods said in a note to clients. Still, the deal has merits “in that it diversifies Ally’s business and also enhances” return on equity, KBW said.
Chief Executive Officer Jeffrey Brown defended the purchase during a conference call with analysts on Wednesday. He said the two companies have been getting to know each other since 2018, and Ally will maintain a “disciplined approach” to risk management even with the addition of the subprime card portfolio.
“This is not a unicorn,” Brown said. “This is a 32-year-old established business that’s been through multiple cycles that is extraordinarily effective at servicing their customers.”
Shares of the company slid 11.5% to $28.33.
“We know the Street is not quite as excited as we are, but we know they’re going to get there as we continue to perform and make this part of a long-term strategy,” Chief Financial Officer Jennifer Laclair said in an interview.
Ally, the former financing arm of General Motors, received a $17.2 billion bailout from U.S. taxpayers.
The company, which said the deal could add as much as 100 basis points to adjusted profits by 2022, has been trying to diversify beyond auto lending. Last year it acquired the point-of-sale lender Health Credit Services for $190 million. The firm’s interest in credit cards comes after it abandoned a proprietary cash-back card it offered with Toronto-Dominion Bank.
Don Berman, founder and CEO of CardWorks, said his company’s charge-offs rose to more than 20% during the last financial crisis. Still, he said, it’s able to react quickly to changes in consumer credit and competition.
“When competition gets somewhat irrational, which we track very carefully, it’s not a time to be very robust, and you pull back a little bit,” Berman said. “And when that competition becomes more rational, you jump back in.”