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Ally Financial (ALLY) Up 12.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Ally Financial (ALLY - Free Report) . Shares have added about 12.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Ally Financial due for a pullback? 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 Posts Q1 Loss on Higher Provisions & Costs

Ally Financial’s first-quarter 2020 adjusted loss was 44 cents per share against the Zacks Consensus Estimate for earnings of 71 cents. The figure deteriorated from the year-ago quarterly earnings of 80 cents per share.

Results reflected substantial reserve build to combat coronavirus-related concerns, which in turn resulted in increase in credit costs. Further, decline in revenues, rise in operating expenses and lower loan balance were headwinds. However, growth in deposit balance was impressive.

After considering non-recurring items, net loss available to common shareholders (on a GAAP basis) was $319 million or 85 cents per share versus net income of $374 million or 92 cents per share recorded in the prior-year quarter.

Revenues Down, Expenses Rise

Total net revenues were $1.41 billion, declining 28.5% year over year. The figure also lagged the Zacks Consensus Estimate of $1.61 billion.

Net financing revenues were up 1.2% from the prior-year number to $1.15 billion. The rise was driven by higher retail auto portfolio yield and balance, and liability mix shift, which were partly offset by lower commercial auto balance and portfolio yield.

Adjusted net interest margin was 2.68%, down 1 basis point (bps).

Total other revenues of $266 million declined 42.9% from the prior-year level.

Total non-interest expenses increased 10.8% year over year to $920 million. The rise was mainly due to an increase in all cost components.

Adjusted efficiency ratio at the end of the first quarter was 52.3%, up from 48.9% recorded in the comparable year-ago period. A rise in efficiency ratio indicates deterioration in profitability.

Credit Quality Worsens

Non-performing loans of $1.46 billion as of Mar 31, 2020 were up 47.7% from the corresponding period of 2019. Further, net charge-off rate was 0.84%, up 11 bps.

Also, provision for loan losses surged to $903 million from $282 million recorded in the prior-year quarter. The drastic increase was due to reserve build, primarily driven by coronavirus-induced economic slowdown.

Strong Balance Sheet & Capital Ratios

Total net finance receivables and loans amounted to $124.9 billion as of Mar 31, 2020, decreasing 1.6% from the fourth quarter. Deposits totaled $122.3 billion, increasing 1.3% sequentially.

As of Mar 31, 2020, total capital ratio was 12.8%, improving from 12.5% in the comparable period of last year. Tier I capital ratio was 10.9% as of Mar 31, 2020, down from 11.0% in the corresponding period of 2019.

Share Repurchases

During the quarter, the company repurchased shares worth $104 million. However, in mid-March, it suspended the share buyback plan through second-quarter 2020 amid coronavirus concerns.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -61.4% due to these changes.

VGM Scores

At this time, Ally Financial has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ally Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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