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    Ally Financial Inc (ALLY)

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    Business Description

    Ally Financial Inc. (NYSE: ALLY) is a leading financial services company that operates the largest all-digital bank in the United States. The company provides a wide range of financial products and services, including automotive financing, insurance, mortgage lending, corporate financing, and investment advisory services. Ally serves approximately 11 million customers and is committed to delivering innovative, customer-centric solutions to meet diverse financial needs.

    1. Automotive Finance Operations - Offers a comprehensive suite of financing services, including retail installment sales contracts, loans, operating leases, dealer floorplan financing, and vehicle remarketing services, catering to consumers, automotive dealers, and municipalities.
    2. Insurance Operations - Provides consumer finance protection and insurance products, such as vehicle service contracts (VSCs), vehicle maintenance contracts (VMCs), guaranteed asset protection (GAP), and select commercial insurance coverages, primarily sold through automotive dealers.
    3. Corporate Finance Operations - Delivers senior secured asset-based and leveraged cash flow loans to U.S.-based middle-market companies, with a focus on private equity-sponsored businesses and commercial real estate lending.
    4. Mortgage Finance Operations - Includes direct-to-consumer mortgage offerings and bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans, offering fixed- and adjustable-rate mortgage products.
    5. Ally Invest - Enhances securities-brokerage and investment-advisory services, enabling customers to manage their savings and wealth through innovative digital tools.
    6. Ally Credit Card - Features a digital-first credit card platform with advanced technology and analytics-based underwriting, designed to deepen customer relationships and expand Ally's offerings.

    Q3 2024 Summary

    Initial Price$39.71July 1, 2024
    Final Price$34.71October 1, 2024
    Price Change$-5.00
    % Change-12.59%

    What went well

    • Ally Financial is confident in achieving mid-teens return on capital over time, based on three key factors: normalization of credit losses, expansion of net interest margin (NIM) to around 4%, and disciplined management of expenses and capital. CEO Michael Rhodes affirms that there is a clear path to reach these targets.
    • Underwriting changes made in 2023 are showing positive results, with the 2023 loan vintages outperforming the 2022 vintages in terms of credit performance. Early data indicates that the 2024 vintages are outperforming 2023, supporting expectations for improved credit and lower losses over time.
    • The company expects net interest margin (NIM) to expand to 4% in the medium term, driven by factors such as portfolio rollover into higher-yielding assets, asset mix shift towards retail auto and corporate finance loans, and favorable deposit pricing approaching a 70% beta in a lower rate environment. Despite near-term pressures, management reiterates that fundamentally nothing has changed in their medium-term outlook.

    What went wrong

    • Capital headwinds expected due to upcoming accounting changes and regulatory requirements, including the final phase-in of CECL accounting and potential changes in accounting for EV lease tax credits, each potentially reducing CET1 capital ratio by approximately 20 basis points.
    • Uncertainty in achieving long-term financial targets, with the CEO acknowledging that prior expectations might have been optimistic and being less prescriptive about the timing of achieving mid-teens return on capital due to uncertainties in credit normalization and interest rate movements.
    • Increasing competitive pressures as competitors reenter the market, which may impact Ally's originated yields and risk-adjusted returns, particularly in prime and super prime segments.

    Q&A Summary

    1. Credit Losses Outlook
      Q: How will retail auto credit losses trend, and when will they normalize?
      A: Management expects retail auto credit losses to normalize over time but acknowledges that the timing is uncertain due to elevated delinquencies and macroeconomic volatility. They have revised the full-year loss rate guidance to 2.25% to 2.30% due to seasonality and impacts from recent storms. The 2023 vintages are showing better performance than 2022, and early indications for 2024 are even better, reflecting underwriting curtailments. However, elevated loss content in the 2022 vintage and sensitivity to the macro environment may prolong the road to normalization.

    2. Net Interest Margin (NIM) Outlook
      Q: When will NIM inflect, and what is the outlook for reaching 4%?
      A: Management reaffirms their medium-term goal of achieving a 4% NIM, driven by factors like asset mix shifts and deposit pricing strategies. Near-term pressures from lower rates and competition may delay inflection, depending on factors like the pace of rate cuts and deposit betas. While avoiding quarterly guidance, they remain confident in reaching the 4% NIM over time.

    3. Confidence in Long-Term Targets
      Q: Are long-term targets, like mid-teens return on capital, still achievable?
      A: Management believes that mid-teens return on capital is attainable, contingent upon three factors: credit normalization, NIM expansion to around 4%, and effective expense and capital management. They acknowledge challenges but see a clear path to achieving these goals, emphasizing confidence in their underwriting and asset strategies.

    4. Capital Levels and Basel III Impact
      Q: What is the target for CET1 capital ratio amid upcoming headwinds?
      A: The CET1 ratio stands at 9.8%, but management anticipates headwinds of approximately 20 basis points from CECL phase-in and potential accounting changes related to EV lease tax credits. They are preparing for Basel III's inclusion of AOCI in CET1 and feel confident in managing capital organically to meet future requirements.

    5. EV Lease Accounting Changes
      Q: How will accounting changes for EV leases impact NIM and earnings?
      A: Management is considering switching from the "flow-through" to the "deferral" accounting method for EV lease tax credits. This change would shift income recognition from the tax line to the NIM line, potentially adding about 6 basis points to NIM in Q3. While this affects the presentation, it doesn't materially change overall earnings or their confidence in achieving the 4% NIM target.

    6. Competitive Environment
      Q: How does increased competition affect originated yields and returns?
      A: While some competitors are re-entering the market, particularly in prime segments, management believes they'll maintain strong relationships with dealers due to their consistency through cycles. Although originated yields may come down as rates decrease, they are confident in the risk-adjusted margins and the quality of the business being booked.

    7. Dealer Relationships and Curtailments
      Q: Will underwriting curtailments affect dealer relationships and volumes?
      A: Management asserts that dealer relationships remain strong, facilitated by their consistent presence in the market and broad range of services. The impact of curtailments is modest from the dealer's perspective due to high application volumes, allowing selective underwriting without significantly affecting dealer partnerships or loan volumes.

    8. Early-Stage Delinquencies
      Q: What are the trends in early-stage delinquencies?
      A: Early-stage delinquencies have remained reasonably stable through September and early October, providing some confidence in future credit performance. Management continues to monitor these trends closely as part of their overall credit outlook.

    Key Metrics

    View all financials →

    Questions to Ask Management

    1. Given the continued elevation in retail auto net charge-offs and the upward revisions to your loss guidance, can you provide more clarity on when you expect credit losses to peak and what specific actions you're taking to mitigate further credit deterioration?

    2. With your net interest margin guidance lowered to approximately 3.2% for 2024 and acknowledging near-term pressures from rate movements, how confident are you in achieving the medium-term NIM target of 4%, and what risks could prevent you from reaching this goal?

    3. You've mentioned building capital in anticipation of Basel III requirements and potential headwinds from CECL phase-in and changes in EV lease accounting; what CET1 ratio are you targeting, and how will these factors impact your capital return plans to shareholders?

    4. Considering the uncertainty around credit normalization timing and net interest margin expansion, what specific measures are you implementing to ensure you achieve the mid-teens return on equity over time, and how are you adjusting your expense management and capital allocation strategies accordingly?

    5. In light of competitive pressures on deposit pricing and the expectation that deposit betas will be slow to decline even as the Fed reduces rates, how do you plan to manage your funding costs, and what strategies are in place to optimize your deposit base to support net interest margin expansion?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateJanuary 10, 2022
    End Date/DurationQ1 2022 - Q4 2022
    Total Additional Amount$2.0 billion
    Remaining Authorization$0
    DetailsPurpose was to return capital to shareholders and reduce outstanding shares by 38% from 484 million (June 30, 2016) to 299 million (December 31, 2022). No new programs authorized for 2023 or 2024.

    Past Guidance

    Here is the exhaustive guidance provided by Ally Financial in the last four earnings calls, including the issued period, guided period, and the list of metrics:

    1. Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Net Interest Margin (NIM): Full-year 2024 NIM outlook updated to approximately 3.2%, assuming another 50 basis point decrease in Fed funds by year-end and a slow start to deposit betas.
      2. Adjusted Other Revenue: Expected to grow by 12% year-over-year, consistent with the July update and above the 5% to 10% guidance provided in January.
      3. Retail Auto Net Charge-Offs (NCOs): Full-year guidance revised to 2.25% to 2.3%, up from the prior guidance of 2.1%.
      4. Total Consolidated Loss Rate: Expected to be 1.5% to 1.55% for the full year.
      5. Adjusted Noninterest Expense: Controllable expenses expected to be down more than 1% year-over-year, with total expenses up less than 2%.
      6. Average Earning Assets: Expected to increase on a linked-quarter basis but still projected to be down approximately 1% for the full year.
      7. Tax Rate: Full-year tax rate guidance updated to negative 25% to 30%, driven by momentum in EV lease originations and updates to the earnings outlook.

    2. Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Adjusted Noninterest Expense: Controllable expenses expected to be down more than 1% year-over-year, with total noninterest expenses up less than 2% year-over-year.
      2. Average Earning Assets: Expected to be down 1% for the full year 2024, reflecting actions taken to manage risk-weighted assets (RWA) and capital levels.
      3. Tax Rate: Full-year tax rate guidance revised to a range of 0% to negative 5%, driven by expectations for EV lease volume in the second half of 2024.
      4. Net Interest Margin (NIM): Expected to exit 2024 near 3.5%; a 4% NIM run rate is expected by the end of 2025 under a range of rate scenarios.
      5. Earnings Per Share (EPS): Targeting $6 of EPS by the end of 2025.
      6. Return on Equity (ROE): Aiming for a mid-teens return run rate by the end of 2025.
      7. Deposit Balances: Targeting approximately flat deposit balances for the remainder of 2024.
      8. Retail Auto Net Charge-Offs (NCOs): Expected to moderate in the second half of 2024 on a seasonally adjusted basis.
      9. Collateral Values: Anticipating a 5% decline in collateral values for the full year 2024, with a 3% decline already observed year-to-date and an additional 2% decline expected for the remainder of the year.
      10. Electric Vehicle (EV) Lease Originations: EV lease originations are expected to continue in size through the remainder of 2024 and into 2025, contributing to the revised tax rate guidance.

    3. Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024 and FY 2025
    • Guidance:
      1. Net Interest Margin (NIM): NIM expansion expected to begin in Q2 2024, with 5 to 15 basis points of expansion per quarter for the rest of the year. Exit rate for 2024 guided at 3.4% to 3.5%. A 4% NIM run rate is expected by late 2025.
      2. Fee Revenue Growth: Increased guidance from 5%-10% to 9%-12% for 2024, driven by momentum in insurance, SmartAuction, and pass-through offerings.
      3. Operating Expenses: Controllable expenses expected to be down 1% year-over-year in 2024. Total expenses expected to increase less than 2% year-over-year, driven by growth in insurance-related commissions and loss expenses.
      4. Consolidated Loss Rate: Expected to remain at 1.4%-1.5% for 2024.
      5. Retail Auto Net Charge-Offs (NCOs): Expected to be approximately 2% for 2024, up marginally from 1.9% in January, with losses driven by the 2022 vintage in the first half of the year and improving trends from the 2023 vintage later in the year.
      6. Used Vehicle Values: Ally expects its used vehicle index to settle at around 120 by the end of 2024, implying a 5%-6% decline from current levels.
      7. Balance Sheet: Total balance sheet expected to remain flat for the foreseeable future, with favorable mix dynamics contributing to NIM expansion.
      8. Tax Rate: Full-year tax rate guidance is 15%, reflecting one quarter of actual results and an estimated rate of around 18% for the remaining quarters. Strong EV lease originations could lead to outperforming this guidance.
      9. Long-Term Targets: Ally remains confident in achieving a 4% NIM, $6 of EPS, and mid-teens ROE on a run-rate basis.

    4. Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024 and beyond
    • Guidance:
      1. Net Interest Margin (NIM): Ally expects to achieve a 4% NIM over time. The pace of achieving this will depend on rate cuts, but the destination remains unchanged.
      2. Retail Auto Net Charge-Offs (NCOs): For 2024, the retail auto NCO rate is expected to remain below 2% for the full year, with elevated losses in the first half due to 2023 vintages, followed by improvement in the second half.
      3. Expense Growth: Total expense growth is expected to be less than 1% for 2024, with controllable expenses projected to decline by more than 1%.
      4. Tax Rate: The full-year tax rate is estimated at 18%, though quarterly fluctuations are expected due to EV tax credits and broader tax planning strategies.
      5. Credit Card Losses: Losses in the credit card portfolio are expected to peak in mid-2024.
      6. Capital Ratios: CET1 ratio is expected to remain relatively flat in Q1 2024, as the benefit from the Ally Lending sale (adding 15 basis points) will be offset by CECL phase-in.
      7. Macroeconomic Assumptions: Ally assumes unemployment will increase to 4.4% in 2024 and longer-term to approximately 6% under their reversion-to-mean methodology.
      8. Earnings Expansion: Ally expects meaningful earnings expansion over the next several years, driven by NIM expansion and a mid-teens ROE in the medium term.

    This table summarizes the guidance provided in the last four earnings calls.