Company Reports

After two years of rapid interest rate hikes, the rising rate cycle is likely over. While there is still considerable uncertainty surrounding the path that interest rates will take from here, the market is now anticipating falling interest rates in 2024, with interest rate futures projecting one to three rate cuts in 2024 and even more the following year. Like their traditional banking peers, many of the consumer finance-focused banks in our coverage did benefit from rising interest rates. However, this benefit was not uniform; there were clear winners and losers. We expect a similar phenomenon in a period of falling interest rates, with different firms holding significantly different exposure to interest rate movements.

Ally is the largest indirect auto lender in the US with the firm acquiring auto loans from tens of thousands of auto dealerships. The bank also offers auto insurance, commercial lending, mortgage finance, and credit cards, though auto loans remain its core focus and largest source of revenue.

No-moat-rated Ally Financial reported decent earnings that were slightly above our expectations, though the firm is still facing downward pressure on its net interest income from funding costs that have risen faster than the yield on its assets. Adjusted earnings per share decreased 45% from last year but were flat sequentially at $0.45. These results translate to a return on equity of 4.5%, below the firm's normal level. As we incorporate these results, we do not plan to materially alter our $43 fair value estimate. Following the market's strong positive reaction, we see the shares as slightly undervalued.

Ally is the largest indirect auto lender in the US with the firm acquiring auto loans from tens of thousands of auto dealerships. The bank also offers auto insurance, commercial lending, mortgage finance, and credit cards, though auto loans remain its core focus and largest source of revenue.

No-moat-rated Ally Financial reported fourth-quarter earnings that were in line with our expectations once some one-time expenses were accounted for. Along with its earnings release, the firm announced it was selling Ally Lending, its point-of-sale personal loan business, to Synchrony. We appreciate this move as it allows the company to focus its resources on its primary growth opportunities.

Ally is the largest indirect auto lender in the U.S. with the firm acquiring auto loans from tens of thousands of auto dealerships. The bank also offers auto insurance, commercial lending, mortgage finance, as well as credit cards and personal loans, though auto loans remain its core focus and largest source of revenue.

No-moat Ally Financial reported third-quarter earnings that were largely in line with our expectations, as deteriorating consumer credit and higher interest rates continue to pressure results. Net revenue decreased 2% from last year and 5% from last quarter to $1.97 billion. Earnings per share were flat at $0.88, which translates to a return on equity of 9.9%. However, this includes a tax benefit of $94 million, or $0.31 per share, during the quarter. As we incorporate these results, we do not plan to materially alter our $39 fair value estimate. We see the shares as undervalued on a full-cycle basis.

No-moat Ally Financial reported decent second-quarter results that were in line with our expectations as lower net interest margins and higher credit costs continue to place downward pressure on results. Net revenue increased 0.7% from last year but was down 0.4% from last quarter to $2.1 billion. Meanwhile, earnings per share fell 29% from last year to $0.99, which translates to a return on tangible equity of 11.8%. The decline in profitability was primarily due to higher provisioning expenses as Ally transitions from a period of unusually low credit costs last year. As we incorporate these results, we do not expect to materially alter our $39 fair value estimate. We see the shares as undervalued at current prices on a full-cycle basis.

We are initiating coverage on Ally Financial with a fair value estimate of $39 per share and assign a no-moat rating, High Uncertainty rating, and a Standard Capital Allocation rating. We see the shares as materially undervalued at the current price, though we caution investors that 2023 will likely be a challenging year for Ally as it faces higher credit costs and lower origination volume. That said, on a full-cycle basis, we believe the business is on a better footing than it was prior to 2020, and we expect higher returns once the current credit cycle has passed.

Ally is the largest indirect auto lender in the U.S. with the firm acquiring auto loans from tens of thousands of auto dealerships. The bank also offers auto insurance, commercial lending, mortgage finance, as well as credit cards and personal loans, though auto loans remain its core focus and largest source of revenue.