Ally Financial ‘s weak third-quarter results were enough for analysts at two major Wall Street shops to downgrade the auto lender. “We are downgrading ALLY shares to Underweight from Equal Weight, as we believe NIM pressure and declining used car pricing will continue to weigh on fundamentals and sentiment,” wrote Wells Fargo analyst Donald Fandetti in a note to clients Thursday. Shares of the financial services and loan provider slumped 3% in premarket trading, building on their near 8% loss from Wednesday, after the company reported third-quarter earnings that fell short of analysts’ expectations and sharing a rise in auto loan losses. “We believe ALLY shares will trade at a discount to tangible book value, as used car prices decline and [net interest margin] moderates around Fed rate hikes,” Fandetti said. He also highlighted the uncertain macro outlook as another support for his underweight rating. Along with the downgrade, Fandetti trimmed earnings per share estimates on the stock and the bank’s price target to $23 from $32 a share. The updated target implies a 13% downside for the stock from Wednesday’s close. Ally’s stock also got hit with a downgrade to equal weight and an earnings per share forecast cut from Morgan Stanley. “While this lower EPS looks priced in, catalysts for a rerating are several quarters out in the base case and further out in the bear,” wrote analyst Betsy Graseck. “These include rate hikes ending, bottoming of used car prices, and credit quality stabilizing.” She expects a hawkish Federal Reserve and falling used car prices to continue weighing on earnings in the near-term and highlighted issues with the company’s funding from high-yield savings deposits. “Other consumer banks are seeing higher deposit costs too,” she said. “But Ally has less flexibility in quickly passing along higher rates to its borrowers given the longer duration and fixed rate nature of its auto loans.” Ally shares have tumbled more than 44% this year. — CNBC’s Michael Bloom contributed reporting
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