Why Santander Consumer, Ally Financial Could be in Trouble

Shares of Santander Consumer USA Holdings Inc. SC lost 6.5% and Ally Financial Inc. ALLY declined 1.2%, on May 30. So, what’s the reason for the price fall?

Per a Bloomberg report, Fiat Chrysler Automobiles NV, both the companies’ auto-finance partner is likely to announce formation of its own finance division in United States as early as Friday. Therefore, this will have a major adverse financial impact on both Santander Consumer and Ally Financial.

Santander Consumer has a 10-year financing agreement with Fiat Chrysler that was inked in 2013. According the company’s latest filings, the agreement can be cancelled in case Chrysler Capital is unable to fulfill origination targets within the first five years. This is could have “materially adverse impact” on Santander Consumer’s operations.

Moreover, as of Dec 31, 2017, Santander Consumer had financed 28% of Fiat Chrysler’s total loans and leases. This was significantly below the target of 65% to be reached by April-end.

For Ally Financial, which originated $2.44 billion worth of loans and leases for Fiat Chrysler dealers in 2017, the expected formation of Fiat Chrysler’s finance division will likely pose a problem. This loan origination accounts for more than 25% of the company’s consumer automotive business.

Therefore, in case Fiat Chrysler actually forms its finance division, it will have a substantial adverse impact on financial performance of Santander Consumer and Ally Financial.

Shares of Santander Consumer have rallied 10.7% while Ally Financial stock has lost 6%, over the last three months. On the other hand, the industry has declined 1.2% in the same time frame.

Currently, both Santander Consumer and Ally Financial carry a Zacks Rank #3 (Hold).

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