Ally Financial flags 'intensifying' credit challenges, shares slump

(Reuters) -Ally Financial's credit challenges have intensified over the current quarter as borrowers struggled with high inflation, the consumer lender's finance chief said on Tuesday, sending its shares tumbling 15%.

Delinquencies in the company's retail auto business rose about a cumulative 20 basis points in July and August compared with Ally's expectations, Chief Financial Officer Russell Hutchinson told investors at a financial conference in New York.

"Our borrower is struggling with high inflation and cost of living, and now more recently, a weakening employment picture," Hutchinson said.

Net charge-offs - or debts that are unlikely to be recovered - in Ally's retail auto business were up about 10 basis points in the same period compared to its expectations.

To address the credit issue Ally had sold its lending business earlier this year to Synchrony Financial that included $2.2 billion of loan receivables. Ally had said the sale would increase its common equity Tier 1 ratio (CET1) by about 15 basis points.

Consumers are increasingly getting affected by high interest rates. As a result, they are cutting back on their spending on products like insurance and loans. As economic uncertainty continues to loom it also increases the chances of more consumers defaulting on their loans.

Hutchinson also said that the company will take a hard look at its reserves as it head towards the end of the quarter and expects to see reserves move up.

(Reporting by Arasu Kannagi Basil and Jaiveer Shekhawat in Bengaluru; Saeed Azhar in New York; Editing by Janane Venkatraman and Maju Samuel)