Ally Financial Inc. (ALLY - Free Report) continues to benefit from a diverse revenue base and growth in demand for consumer loans. However, near-zero interest rates and deteriorating asset quality are major near-term concerns.
Ally Financial’s growth in the key component of revenue, namely total financing revenues and other interest income over the years has been impressive. It witnessed a CAGR of 4.1% over the last five years (2015-2019). While the same declined in the first half of 2020; robust origination volumes, growth in retail loans and increase in deposit balances are likely to sustain the momentum.
Moreover, Ally Financial’s strategy to diversify revenue base is expected to be beneficial. The company’s foray into the mortgage business is supporting growth. Additionally, the company has been making efforts to bolster its digital offerings and introduce products to further support profitability. Moreover, the company’s wealth management and online brokerage initiatives related to the credit card offerings is likely to bode well.
Further, analysts seems to be bullish on the stock. The Zacks Consensus Estimate for earnings has been revised 16.9% and 2.7% upward for 2020 and 2021, respectively in the past month.
However, the prevailing low interest rate environment and the Federal Reserve signaling no change in the rates in the near-term are likely to keep Ally Financial’s margins under pressure in the quarters ahead. The company’s net interest margin declined in the first six months of 2020 due to near-zero interest rates.
Moreover, deteriorating asset quality remains a concern for the company. Although the company’s provision for loan losses and net-charge offs (NCOs) declined in 2018, the same witnessed a CAGR of 9% and 12.5%, respectively, over the last five years (2015-2019). Thanks to the concerns related to the coronavirus outbreak, both provisions and NCOs witnessed a rise in the first half of 2020. Steadily worsening credit quality is expected to dampen the company’s financials.
Also, shares of this Zacks Rank #3 (Hold) company have lost 22.5% so far this year compared with the 19.2% decline recorded by the industry.
Stocks to Consider
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