Ally Financial: Massive buybacks, credit quality, attractive P/E (NYSE: ALLY)

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Used car prices are good for lenders

Second-hand cars prices increased by 40.5% in January 2022 compared to a year earlier. One of the main beneficiaries of rising used car prices is the banking sector, which has seen recoveries on auto loan repayments hit a record high in 2021.

Investors shun auto industry

Investors are wary of the auto industry.

On February 9, I published an article highlighting the case of car dealership Lithia Motors, Inc. (LAD).

Today’s article focuses on Ally Financial, Inc. (ALLY), the US bank with the most exposure to auto loans.

ALLY and Lithia share three facts:

  • P/E ratios below 9x
  • Consensus Analyst Buy Rating: 1.7
  • Excellent ROE: 20% ALLY, 30% Lithia

FDIC YE 2021 data for US auto loans

ALLY’s success is directly tied to the overall success of auto loans in the United States. I looked at FDIC data (source: BANKREGDATA) for auto loan trends for all US banks since 2016.

Here are the key findings for the year ending December 2021:

  • Loan growth
    • 9.4% year-over-year growth vs. 3.5% for all loans
  • Credit quality
    • 0.20% net write-offs in 2021 compared to 0.76% on average. 2016-2020
    • 1.29% of loans in arrears (30-89 days) against 1.83% on average. 2016-2020
  • Collections
    • Loan recoveries in 2021 = $3.1 billion. compared to debits of $4.1.
    • Recovery/Loading ratio in 2021: 77% against a 2016-2020 average of 41%.
  • Yields
    • 4Q 2021 auto loan yields: 4.69% vs. 5.17% in 4Q 2020, 5.77% in 4Q 2019.
  • Four banks dominate auto loan in usa
    • 49% of the industry’s $537 bill. car loans held by four banks.
    • These banks are ALLY, Capital One Financial Corporation (COF), Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM).


  • Banks like auto loans judging by an annual growth rate of 9.3%.
  • Falling loan yields are a function of three factors: competition, falling cost of funds, changes in credit quality.
  • Credit quality is strong given healthy consumers and high used car prices.
  • The Big Four Lenders hold Narrow Moats.

Key ALLY numbers

Per Ycharts, as of market close February 18:

  • Closing price on February 8: $49.76
  • Analyst consensus 12 months price: $65.20
  • 12 months price change: 22.8%
  • 12 months price range: $40.64 – $56.61
  • Market cap: $16.8 billion.
  • PER: 6.1
  • Forward P/E: 6.5x
  • Price/Tangible Book Value: 1.14x
  • Number of YE 2021 shares: 337.9 million. (-9.8% Y/Y, down -16.5% since YE 2018)
  • Dividend yield: 1.98%
  • Payout rate: 9%
  • ROE: 20.6%
  • Beta (5 years): 1.43

Key Comments, January Earnings Report/Call Data

Comments from ALLY’s CEO (from the bank’s recent 10-Q):

“In 2021, Ally solidified its position as a leading and disruptive growth company, delivering record results on our financial services and digital banking platforms for dealers… We generated the highest total revenue, PPNR and net revenue levels, added new product capabilities and surpassed 10 million customers in total across the wide range of Ally products. »

During the January earnings call, the CFO and CEO made the following key comments:

Asset quality remained strong throughout the fourth quarter as consumer and business losses remained historically low…”

“… used car prices... we see them in our financial plan is moderating. But I think if you look at current trends, you look at the environment…used car prices are still very high…our outlook…this year is a really robust used car market .”

“And we guided to NIM (net interest margin) expansion now for years…this has been a guide regardless of rate trajectory…we expect NIM to grow regardless of rates.

” I mentioned assets reaching $200 billion ($180 billion in 2021) and in the medium term…driven by all portfolios…auto retail…we had $46.3 billion this year, we are heading towards a low of $40 billion dollars.”

ALLY: Add to trading account

I do not currently own ALLY. I intend to write call and put options on ALLY in the coming months during times of high volatility.

Here’s what I like about ALLY:

  • Strong management whom I trust (several former colleagues from my time at Bank of America).
  • $2 billion redeem projected for 2022 (on $16.8 billion. current market capitalization).
  • Credit quality metrics are expected to remain excellent through at least the first half of 2022. Confident auto loan recoveries will reduce downside risk. Strong employment numbers and rising wages are bolstering consumer health.
  • more than enough Allocation for loan/lease losses robust at 2.69% compared to a net write-off ratio that averaged 1.01% from 2016 to 2021 (0.46% in 2021). Don’t be surprised that ALLY doesn’t release Provision in the first quarter of 2022.
  • According to Ycharts, of the twenty analysts who track ALLY, as of February 18, the 12-month target range is $52 to $81 (average $65.20), with nine buys, eight outperforms and three takes, resulting in a Composite buy rating of 1.70.
  • Among the twenty largest U.S. banks, ALLY has the highest analyst consensus purchase note.


Main concerns/risks that could temper enthusiasm:

  • Inject Fuel prices pushing the US economy into recession.
  • Rise in interest rates.
    • Although the CFO said in January that the rate hike would help broaden ALLY’s NIM, the recent 10-Q interest rate sensitivity chart did not appear to support the CFO’s view. Rising rates will clearly help some banks, but ALLY is not an outright winner. In fact, if rates get too high, auto sales could suffer. Also, ALLY does not have a reliable source of cheap base deposits.
  • The month of June Fed stress test is a wildcard.
    • The Fed recently announced its benchmarks that seem to suggest a global depression (eg commercial real estate prices down 40%). An expensive stress test could be a back door way for Democratic Sen. Elizabeth Warren (who influences President Biden who appoints Fed governors) to get what she’s long sought: more capital in US banks. If the stress test leads to questions about banks’ capital adequacy ratios, bank investors can expect to see buyout plans slowed or even reduced.
    • Investors should be very careful about whether Sarah Bloom Rankin Gets US Senate Approval as she will be the main Fed official overseeing the stress tests.

Although ALLY fits my risk/reward profile as an investor, investors interested in ALLY should do their homework before investing. ALLY’s high beta indicates significant volatility. Additionally, unlike large banks with highly diversified loan portfolios, ALLY investors face concentration risk. I think the main reason why ALLY’s P/E and P/TBV are so low is the bank’s single sector exposure.

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