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Ally Financial (ALLY) Down 0.4% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Ally Financial (ALLY - Free Report) . Shares have lost about 0.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ally Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Ally Financial Q2 Earnings Beat, Revenues Improve Y/Y

Ally Financial’s second-quarter 2021 adjusted earnings of $2.33 per share convincingly surpassed the Zacks Consensus Estimate of $1.55. The bottom line showed significant improvement from 61 cents recorded a year ago.

Results benefited primarily from an improvement in revenues, partly offset by higher expenses. The company recorded provision benefits in the quarter, which was a major positive. However, loans and deposit balances declined marginally.

After considering non-recurring items, net income (on a GAAP basis) was $900 million or $2.41 per share, up from $241 million or 64 cents in the prior-year quarter.

Revenues Improve, Expenses Rise

Total GAAP net revenues were $2.09 billion, up 29.6% year over year. The reported figure outpaced the Zacks Consensus Estimate of $1.87 billion.

Net financing revenues were up 46.8% from the prior-year quarter to $1.55 billion. The rise was driven by lower funding costs, higher retail auto revenues and better gains on off-lease vehicles. These were partially offset by lower held for investment mortgage and commercial auto portfolio balances.

Adjusted net interest margin was 3.57%, up 115 basis points (bps) year over year.

Total other revenues were $538 million, down 3.1% from the prior-year quarter.

Total non-interest expenses were up 9.1% year over year to $1.08 billion. The upswing stemmed from a rise in compensation and benefits expenses, and other operating expenses.

Adjusted efficiency ratio at the end of the second quarter was 44.5%, down from 52.5% in the year-ago period. A decline in efficiency ratio indicates an improvement in profitability.

Credit Quality Improves

Non-performing loans of $1.28 billion, as of Jun 30, 2021, were down 16.3% year over year. In the reported quarter, the company recorded net recoveries of $6 million against NCOs of $178 million in the prior-year quarter.

Provision for loan losses was a benefit of $32 million against a provision of $287 million in the prior-year quarter.

Loans & Deposit Balances Decline

As of Jun 30, 2021, total net finance receivables and loans amounted to $109.1 billion, down marginally from the first-quarter 2021 level. Also, deposits totaled $139.1 billion, down marginally on a sequential basis.

Capital Ratios Improve

As of Jun 30, 2021, total capital ratio was 14.8%, up from 13.8% in the prior-year quarter. Tier I capital ratio was 13.1%, up from 11.9% as of Jun 30, 2020.

Share Repurchase Update

In the quarter, the company repurchased shares worth $502 million.

Outlook

Total revenue growth of more than 20% is expected in 2021.

Other revenues are anticipated to continue to improve, driven by consumer offerings and ongoing insurance expansion.

The company expects operating leverage gains in the mid-teens range in 2021.

NIM is expected to expand in the mid to upper 3% range, which along with loan growth is expected to drive net interest income.

Retail auto origination yields in 2021 are expected in the 7% range and used-car values are expected to increase in the mid-to-upper 20% range year over year.

NCOs are projected to stabilize at 1.4-1.6% in 2022 and 2023.

The company expects return on tangible common equity (ROTCE) expansion in the mid-teens in the long term. In 2021, excluding the impact of reserve release activity, ROTCE is expected in the 20% range.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 24.01% due to these changes.

VGM Scores

At this time, Ally Financial has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Ally Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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