Should Investing in Ally Corporation's Shares be Considered at Present?
Last year saw banks raking in the profits, with the Dow Jones U.S. Banks Index soaring by 37%, leaving the S&P 500's 25% gain in the dust. Even during economic turmoil, banks managed to thrive, and a September interest rate cut from the Federal Reserve provided an additional boost.
Ally Financial, however, didn't share in this prosperity quite as much. The company, known for its status as the top all-digital bank in the U.S. and leading prime auto lender, only managed a 3% gain in 2024. Over the past six months, the shares have taken a hit, dropping by 13%. Despite these challenges, Ally's unique offerings make it a bank worth reconsidering.
A Leader in the Digital Banking Space
Established in 2010 as a spin-off from General Motors, Ally capitalized on being an early player in the digital banking world. With a century's worth of data and experience, Ally has grown into the largest all-digital bank in the country.
In Q3 alone, Ally added 57,000 net new deposit customers, bringing its total to 3.3 million. The bank boasts an impressive 95% retention rate and saw retail deposits increase by $1.3 billion in 2024, totaling $141.4 billion. The attraction for younger generations, primarily millennials and Gen Z, to Ally's digital platform provides the bank with significant long-term growth opportunities.
Robust Auto Lending Business
Auto lending remains Ally's core business. In Q3, the company received 3.6 million auto loan applications, and originated $9.5 billion in auto loans. Despite high interest rates, loan applications continue to rise, and Ally anticipates around 14 million for the full year, up from 13.8 million last year.
Ally has become more cautious in the auto loan division, with an increased focus on credit quality. The weighted average FICO credit score for loans has risen to 710, close to the average considered good. The approval rate has dropped from 30% to 28%, and 43% of loans are now going to customers in the highest credit tier.
Undervalued Stock with a High Dividend
Ally's stock may be under pressure, but it hasn't stopped the company from reporting rising earnings per share and return on tangible common equity in Q3. Although investors may be apprehensive about smaller banks in light of recent bank failures, Ally's management has taken steps to address concerns, strengthening its position.
The market hasn't quite caught on to Ally's growth potential, with the stock currently trading at a price-to-book ratio of about 0.9 and a forward one-year P/E ratio of 6. This low valuation allows the dividend to provide a generous yield of 3.4%, beating out many bank stocks.
In 2024, Ally's stock experienced a setback, but its digital platform and robust auto loan business set the stage for future growth. Investors looking for a promising bank stock may find Ally Financial to be an attractive option.
Enrichment Data:
Ally Financial's success is influenced by several factors, creating a complex picture for investors. Key elements include:
Positive Factors:
- Strong Market Position: Ally holds a prominent position in the market, with relationships with over 22,000 auto dealers and a network of customer connections[5]. This competitive edge can drive future performance.
- Improving Credit Quality: Ally has observed an improvement in consumer credit trends, with year-over-year reductions in net charge-offs (NCOs) expected to continue throughout 2024[1].
- Core Business Focus: The firm is refocusing on its core businesses of dealer financing, corporate financing, and consumer banking[4]. This strategic shift can help increase margins and optimize revenue streams.
- Growing Earnings Projections: Analysts anticipate EPS estimates for fiscal year 2024 to hover around $2.90, with a significant increase to approximately $4.00 for fiscal year 2025[1]. This outlook bodes well for Ally's future prospects.
Negative Factors:
- Underperformance in 2024: Ally's stock has lagged behind the market's gains in 2024, with concerns about rising defaults and demand impacting the firm's valuation[4].
- Challenges in Fee Income: While fee income streams have been in flux, Ally must diversify its revenue streams to remain resilient in a continually evolving market[1].
- Risk Management Concerns: Ally has upped its forecast for retail auto NCOs, highlighting the necessity for diligent risk management[1].
- Market Volatility: The uncertainty surrounding interest rate cuts and future monetary policy decisions adds another layer of complexity to Ally's planning[4].
Overall Outlook:Ally Financial combines strong market presence, a refocused strategy, digital-first approach, and an optimistic earnings outlook to build a solid foundation for growth. Alongside ongoing challenges in fee income and risk management, the bank must remain nimble to maintain its competitive edge.
The upcoming year could serve as a turning point for Ally, as potential interest rate cuts and a refocused strategy can boost financial performance and potentially boost stock valuations[4].
Investors looking to explore opportunities in banking might consider Ally Financial, despite its 3% gain in 2024 and recent stock drop, as its unique offerings and robust auto lending business present potential for future growth. If one is interested in investing in banks, Ally's undervalued stock with a high dividend yield of 3.4% could be a worthwhile consideration, given its positive factors such as strong market position, improving credit quality, and refocused strategy.