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Ally Financial's Ratings Upgraded by Moody's, Outlook Stable

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Ally Financial’s (ALLY - Free Report) ratings have been upgraded by Moody's Investors Service. This is the second time that ratings have been raised. Earlier in February, the company’s ratings had been upgraded.

Ally Financial’s issuer rating witnessed a progress to Ba1 from Ba2. Also, its senior unsecured medium term note program and senior unsecured regular bond/debenture rating have been raised to Ba1 from Ba2.

Further, the rating agency affirmed the company’s short-term ratings. Also, Ally Financial’s ratings outlook have been left unchanged at stable.

Why the Ratings Upgrade

Per Moody’s, Ally Financial continues to witness improvement in its funding profile, driven by stable performance in the auto loan portfolio and steady deposit growth. As of Sep 30, 2019, the company’s total deposits have risen 18% year over year. This rapid increase in deposits reflect the company’s “growing franchise, which has allowed the bank to transform to a primarily bank-funded model.”

Ally Financial’s ratio of market funds as a percentage of tangible banking assets as of Sep 30, 2019 fell significantly from the 2018-end level. Moreover, Ally Financial has been able to grow its used auto loan portfolio to 53% of retail auto originations for the same time period.

Though growth in used auto portfolio had resulted in a rise in credit costs from 2015 through 2017, the same has been gradually stabilizing since then. This is mainly backed by conservative underwriting quality, strong domestic economy and stabilized used car values.

Therefore, Ally Financial has been able to improve profitability over the last several years. Per the rating agency, the company’s net income to average assets ratio of 1.0% as of Sep 30, 2019, shows improvement from 0.7% for full-year 2018. Though profitability is likely to continue improving at a moderate pace going forward, it is expected to trail the 1.2% average for regional banks.

What Can Further Boost/Bring Down Ratings

A further upgrade in ratings is possible if Ally Financial continues to grow its deposit base and reasonably underwrites growing auto channels. A prudent diversification of the overall portfolio may also result in a ratings upgrade.

A rating downgrade could occur if there is a significant decrease in the deposit base. A decline in franchised dealer relationship may also lead to a rating downgrade. Further, if growth in riskier credit quality assets hurts asset performance and weakens financial metrics, there might be a rating downgrade.

Zacks Rank & Price Performance

Ally Financial currently carries a Zacks Rank #3 (Hold). Shares of the company have rallied 36% so far this year, marginally outperforming the industry’s rise of 35.6%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ratings Actions by Moody’s on Other Consumer Loan Stocks

Over the past three months, Moody’s has upgraded SLM Corporation’s (SLM - Free Report) long-term senior unsecured rating from Ba2 to Ba1. The outlook has remained stable.

Further, long-term senior unsecured ratings of both Navient Corporation (NAVI - Free Report) and Credit Acceptance Corporation (CACC - Free Report) have been affirmed at Ba3 by Moody’s. Also, the outlook for both the companies remained stable.

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