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Retail Loan Growth to Aid Ally Financial (ALLY) Amid Cost Woes
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Ally Financial Inc.’s (ALLY - Free Report) efforts to expand inorganically, along with its revenue diversification initiatives, are expected to keep supporting financials. Given its robust capital and liquidity position, the company will likely be able to sustain efficient capital deployments in the future.
Analysts are also optimistic regarding its earnings growth potential. The Zacks Consensus Estimate for ALLY’s 2023 earnings has been revised 2.8% upward over the past 30 days.
However, persistently rising expenses will likely hurt the company’s bottom line. Deteriorating credit quality is another concern. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of ALLY have lost 37.8% compared with the industry’s 20.6% decline.
Image Source: Zacks Investment Research
Looking at its fundamentals, ALLY’s net financing revenues (one of the key sources of revenues) witnessed a compound annual growth rate (CAGR) of 9.8% over the last seven years (2016-2022). Strong origination volumes, retail loan growth and a rise in deposit balances are expected to keep supporting revenue growth. According to our estimates, net financing revenues will witness a CAGR of 3% over the next three years.
While the company’s net interest margin (NIM) declined in 2020 because of lower rates, the same increased in 2021 and 2022. Given that the Federal Reserve has been raising interest rates since March 2022, the company’s NIM is expected to improve further. Management expects NIM to be 3.5% in 2023 as the Fed Funds rate peaks. Beyond that, NIM is expected to reach 4%.
As part of its strategy to diversify into banking products, Ally Financial has forayed into the mortgage business, which is supporting its earnings. The company has been making efforts to enhance digital offerings and introduce products to further boost profitability. Its wealth management and online brokerage initiatives related to credit card offerings remain impressive.
However, over the last seven years (ended 2022), the company’s expenses witnessed a CAGR of 8.1%. The rise was mainly due to higher compensation and benefits expenses. With the company launching products, seeking opportunistic buyouts and expanding into newer areas of operations, expenses are expected to remain elevated. We project total non-interest expenses to rise 5.1% in 2023, 3.9% in 2024 and 15.4% in 2025 on a year-over-year basis.
Poor asset quality is another headwind for Ally Financial. Although the company’s net charge offs (NCOs) declined in 2020 and 2021, it witnessed a year-over-year rise in 2022. Per our estimates, NCOs will increase 67.4% in 2023 on a year-over-year basis.
Moreover, the company’s provision for loan losses has been volatile (increasing in 2020, falling in 2021 and then rising again in 2022). Given the rise in demand for consumer loans, provisions are expected to increase in the upcoming quarters. We project provision for loan losses to increase 21.5% in 2023.
Stocks Worth a Look
A couple of better-ranked stocks from the finance space are The Bank of New York Mellon (BK - Free Report) and State Street (STT - Free Report) .
The Zacks Consensus Estimate for BNY Mellon’s current-year earnings has moved 1.5% higher over the past 30 days. Its shares have gained 16.7% in the past six months. Currently, BK sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
State Street currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been revised 3.3% upward over the past 30 days. In the past six months, STT’s shares have rallied 24.9%.
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Retail Loan Growth to Aid Ally Financial (ALLY) Amid Cost Woes
Ally Financial Inc.’s (ALLY - Free Report) efforts to expand inorganically, along with its revenue diversification initiatives, are expected to keep supporting financials. Given its robust capital and liquidity position, the company will likely be able to sustain efficient capital deployments in the future.
Analysts are also optimistic regarding its earnings growth potential. The Zacks Consensus Estimate for ALLY’s 2023 earnings has been revised 2.8% upward over the past 30 days.
However, persistently rising expenses will likely hurt the company’s bottom line. Deteriorating credit quality is another concern. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of ALLY have lost 37.8% compared with the industry’s 20.6% decline.
Image Source: Zacks Investment Research
Looking at its fundamentals, ALLY’s net financing revenues (one of the key sources of revenues) witnessed a compound annual growth rate (CAGR) of 9.8% over the last seven years (2016-2022). Strong origination volumes, retail loan growth and a rise in deposit balances are expected to keep supporting revenue growth. According to our estimates, net financing revenues will witness a CAGR of 3% over the next three years.
While the company’s net interest margin (NIM) declined in 2020 because of lower rates, the same increased in 2021 and 2022. Given that the Federal Reserve has been raising interest rates since March 2022, the company’s NIM is expected to improve further. Management expects NIM to be 3.5% in 2023 as the Fed Funds rate peaks. Beyond that, NIM is expected to reach 4%.
As part of its strategy to diversify into banking products, Ally Financial has forayed into the mortgage business, which is supporting its earnings. The company has been making efforts to enhance digital offerings and introduce products to further boost profitability. Its wealth management and online brokerage initiatives related to credit card offerings remain impressive.
However, over the last seven years (ended 2022), the company’s expenses witnessed a CAGR of 8.1%. The rise was mainly due to higher compensation and benefits expenses. With the company launching products, seeking opportunistic buyouts and expanding into newer areas of operations, expenses are expected to remain elevated. We project total non-interest expenses to rise 5.1% in 2023, 3.9% in 2024 and 15.4% in 2025 on a year-over-year basis.
Poor asset quality is another headwind for Ally Financial. Although the company’s net charge offs (NCOs) declined in 2020 and 2021, it witnessed a year-over-year rise in 2022. Per our estimates, NCOs will increase 67.4% in 2023 on a year-over-year basis.
Moreover, the company’s provision for loan losses has been volatile (increasing in 2020, falling in 2021 and then rising again in 2022). Given the rise in demand for consumer loans, provisions are expected to increase in the upcoming quarters. We project provision for loan losses to increase 21.5% in 2023.
Stocks Worth a Look
A couple of better-ranked stocks from the finance space are The Bank of New York Mellon (BK - Free Report) and State Street (STT - Free Report) .
The Zacks Consensus Estimate for BNY Mellon’s current-year earnings has moved 1.5% higher over the past 30 days. Its shares have gained 16.7% in the past six months. Currently, BK sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
State Street currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been revised 3.3% upward over the past 30 days. In the past six months, STT’s shares have rallied 24.9%.