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Ally Financial (ALLY) Ratings Upgraded by Moody's, Outlook Stable
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Ally Financial Inc.’s (ALLY - Free Report) issuer as well as senior long-term unsecured ratings have been upgraded to Baa3 from Ba1 by Moody’s Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) . The rating agency had placed the company’s ratings under review for upgrade in May.
The outlook of the company was unchanged at stable. This reflected the rating agency’s view that Ally Financial will be able to maintain its present solid “credit profile over the next 12-18 months.” Also, Moody’s is of the opinion that the company will be able to absorb any future credit losses arising from the coronavirus pandemic without hurting its earnings.
Reasons for Ratings Upgrade
Ally Financial, which primarily focuses on the auto finance sector, has been able improve its liquidity, funding and capital positions over the last several quarters, despite the COVID-19-induced economic ambiguity. While the company’s profitability deteriorated during the first half of 2020 due to higher credit losses (following the adoption of CECL accounting provisions and worsening economic backdrop), it has bounced back to the pre-pandemic level.
The rating agency noted that one of the primary reasons behind the ratings upgrade is Ally Financial’s robust liquidity position. The company has been able to consistently increase its core deposit base over the last several years. This has resulted in a funding profile that is almost similar to its regional bank peers. Per Moody’s, deposits were 89% of total funding as of Jun 30, 2021, a rise from 75% at 2019-end and 66% at 2018 end.
The company’s common equity Tier 1 ratio was 11.3% as of Jun 30, 2021, up from 10.6% on Dec 31, 2020 and 9.5% on Dec 31, 2019. Though capitalization will fall from this level given Ally Financial's share repurchase authorization, Moody's anticipates it to remain solid.
Further, Ally Financial’s asset quality remained strong, mainly driven by huge fiscal stimulus. The rating agency projects the company’s net charge-offs for auto loans to be relatively stable this year and then peak above the 2019 level in 2022.
When Can the Ratings be Upgraded/Downgraded?
The ratings could be upgraded, provided the company continues to reduce its reliance on auto finance and thereby develop a diversified revenue mix. Also, if Ally Financial demonstrates stable asset quality and profitability, and maintains improved funding and liquidity profiles, its ratings could be upgraded.
Ally Financial’s ratings could be downgraded if its capitalization weakens beyond Moody’s expectations. Also, “a strategic misstep amid its ongoing business execution,” a fall in core deposit funding or worsening credit quality will be negative for the company’s ratings.
Our Take
The company's efforts to diversify the revenue base, gradual rise in demand for consumer loans and increase in deposit balances are expected to continue supporting its financials. Ally Bank’s (the digital bank and a division of Ally Financial) announcement of the elimination of overdraft fees on all accounts in June is likely to turn out to be a game changer and help garner market share. Earlier this year, several banks like Regions Financial (RF - Free Report) , Fifth Third Bancorp and Huntington Bancshares (HBAN - Free Report) have also taken steps to limit overdraft fees, while not totally eliminating the same.
While persistently rising expenses and near-zero interest rates remain major concerns for the company, Ally Financial is expected to be able to sustain efficient capital deployment activities, given a robust capital and liquidity position.
Shares of Ally Financial have surged 134% over the past year, outperforming the rally of 118.6% for the industry it belongs to.
Image: Bigstock
Ally Financial (ALLY) Ratings Upgraded by Moody's, Outlook Stable
Ally Financial Inc.’s (ALLY - Free Report) issuer as well as senior long-term unsecured ratings have been upgraded to Baa3 from Ba1 by Moody’s Investors Service — the rating services arm of Moody's Corporation (MCO - Free Report) . The rating agency had placed the company’s ratings under review for upgrade in May.
The outlook of the company was unchanged at stable. This reflected the rating agency’s view that Ally Financial will be able to maintain its present solid “credit profile over the next 12-18 months.” Also, Moody’s is of the opinion that the company will be able to absorb any future credit losses arising from the coronavirus pandemic without hurting its earnings.
Reasons for Ratings Upgrade
Ally Financial, which primarily focuses on the auto finance sector, has been able improve its liquidity, funding and capital positions over the last several quarters, despite the COVID-19-induced economic ambiguity. While the company’s profitability deteriorated during the first half of 2020 due to higher credit losses (following the adoption of CECL accounting provisions and worsening economic backdrop), it has bounced back to the pre-pandemic level.
The rating agency noted that one of the primary reasons behind the ratings upgrade is Ally Financial’s robust liquidity position. The company has been able to consistently increase its core deposit base over the last several years. This has resulted in a funding profile that is almost similar to its regional bank peers. Per Moody’s, deposits were 89% of total funding as of Jun 30, 2021, a rise from 75% at 2019-end and 66% at 2018 end.
The company’s common equity Tier 1 ratio was 11.3% as of Jun 30, 2021, up from 10.6% on Dec 31, 2020 and 9.5% on Dec 31, 2019. Though capitalization will fall from this level given Ally Financial's share repurchase authorization, Moody's anticipates it to remain solid.
Further, Ally Financial’s asset quality remained strong, mainly driven by huge fiscal stimulus. The rating agency projects the company’s net charge-offs for auto loans to be relatively stable this year and then peak above the 2019 level in 2022.
When Can the Ratings be Upgraded/Downgraded?
The ratings could be upgraded, provided the company continues to reduce its reliance on auto finance and thereby develop a diversified revenue mix. Also, if Ally Financial demonstrates stable asset quality and profitability, and maintains improved funding and liquidity profiles, its ratings could be upgraded.
Ally Financial’s ratings could be downgraded if its capitalization weakens beyond Moody’s expectations. Also, “a strategic misstep amid its ongoing business execution,” a fall in core deposit funding or worsening credit quality will be negative for the company’s ratings.
Our Take
The company's efforts to diversify the revenue base, gradual rise in demand for consumer loans and increase in deposit balances are expected to continue supporting its financials. Ally Bank’s (the digital bank and a division of Ally Financial) announcement of the elimination of overdraft fees on all accounts in June is likely to turn out to be a game changer and help garner market share. Earlier this year, several banks like Regions Financial (RF - Free Report) , Fifth Third Bancorp and Huntington Bancshares (HBAN - Free Report) have also taken steps to limit overdraft fees, while not totally eliminating the same.
While persistently rising expenses and near-zero interest rates remain major concerns for the company, Ally Financial is expected to be able to sustain efficient capital deployment activities, given a robust capital and liquidity position.
Shares of Ally Financial have surged 134% over the past year, outperforming the rally of 118.6% for the industry it belongs to.
Image Source: Zacks Investment Research
Currently, Ally Financial sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.