Ally Financial Inc May Be the Future of Banking, But Is It a Good Investment?

Ally offers some of the best rates in banking and has low fixed costs, but does its valuation make sense compared to the other banks?

Jun 4, 2014 at 7:00AM

Ally Financial (NYSE:ALLY) is capitalizing on the trend of every facet of life going mobile – even banking. The company is an Internet-focused bank with no brick-and-mortar locations. Its customers do their banking solely through the bank's website, its mobile application, and automatic teller machines.

I outlined the significant benefits that Ally offers to its customers compared to the bigger and more traditional banks such as Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) in my previous article, reimbursing customers for fees generated by using ATMs and offers its customers electronic check deposits. More importantly, the rates that Ally offers on its savings, checking, and certificate of deposit accounts are significantly higher than the more traditional players.

How does Ally stack up against Bank of America, JPMorgan Chase, and Warren Buffett's favorite bank Wells Fargo (NYSE:WFC) on a valuation basis, though?

 P/EForward P/E
Ally Financial --  11
Bank of America 20 10
JPMorgan Chase 14 9
Wells Fargo 13 12

Ally does not have positive earnings on a trailing twelve months basis, but the bank did report positive earnings in its latest quarter with EPS of $0.33 on net income of $227 million . Further, Ally is expected to be profitable in the next year as reflected in its forward P/E of 11. Compared to the other banks, however, Ally does not stand out on a forward P/E basis. JPMorgan Chase has the lowest forward P/E at 9, but all of the banks are not far behind, with Wells Fargo having the largest forward P/E at 12.

A clear consensus is not evident with respect to investing in one of the banks on a forward P/E basis. However, as discussed by Patrick Morris in his article about bank valuations, P/E metrics can be misleading indicators of valuation for the banking industry. Valuation multiples such as P/B and P/TBV are more indicative of a bank's valuation because they show whether the market believes a bank is worth more as an ongoing concern or as a dead company.

Ally Financial 0.9 0.9
Bank of America 0.7 1.1
JPMorgan Chase 1.0 1.3
Wells Fargo 1.7 2.0

P/B and P/TBV values below one indicate that investors as a whole think that a particular bank is worth more if it liquidated its assets instead of utilizing them to generate revenue and hopefully, income. If a bank is not expected to be profitable, then P/B and P/TBV values equal to or below one would be warranted. Furthermore, P/TBV excludes intangible assets such as goodwill in its calculation in order to get a better feel for a bank's valuation if it was indeed liquidated.

On a tangible book basis, Ally is trading at a price that infers the bank is not worth much as a going concern. Although Ally was not profitable in its last fiscal year, it showed a lot of promise by returning to profitability in its latest quarter. Furthermore, Ally does not carry a lot of intangible assets on its balance sheet like the other banks, evidenced by its equal P/B and P/TBV ratios. Therefore, investors can be more assured of the valuation of Ally on a book value basis.

Bank of America, JPMorgan Chase, and Wells Fargo show that they carry a substantial amount of intangible assets as their P/TBV values exceed their P/BV values. Considering their respective P/TBV values, Bank of America and JPMorgan Chase seem to be fairly valued. Wells Fargo, on the other hand, looks richly valued with the highest P/TBV out of the four banks at a value of 2.

Is Ally worth the price?
Wells Fargo is the cheapest stock looking back twelve months on an earnings basis, while JPMorgan Chase is looking forward twelve months. On the other hand, Bank of America looks the most attractive on a book value basis. Ally gains its luster when evaluating the banks on a tangible book value basis, however, with a P/TBV under one at 0.8.

Although the valuation metrics are mixed, the ones that consider book value and tangible book value are the most relevant in my opinion, with tangible book value even more so than book value. Therefore, Ally looks the most attractive as an investor would be paying less than its liquidation value on both a P/B and P/TBV basis. Moreover, if Ally continues to be profitable as it was in its last quarter, then its book value multiples look even more attractive and are an indication to invest in a cheaply valued bank.

I believe Ally is more of a play on the future of banking, as it is positioned to capitalize on the mobile banking trend and a younger demographic that is more apt to do banking online. Furthermore, Ally offers some of the best rates on financial products among the banks and could see an influx of customers in the next five years. Considering that an investor can purchase Ally for less than it is worth, I think Ally will be a solid investment going forward.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $50 calls on Wells Fargo and short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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