The early days of the COVID-19 pandemic were rough on most financial companies, especially banks and real estate investment trusts. Banks were forced to take huge provisions for potential credit losses under the new Current Expected Credit Loss (CECL) methodology, which then ran into COVID-19 provisions.

Some of these companies are reporting declining year-over-year earnings. However, the sequential quarterly numbers tell a different story. Ally Financial (NYSE:ALLY) is a good example. 

Annual comparisons are tough, but quarterly comparisons are quite good

Ally just reported full-year earnings per share of $2.88, down 34% on a year-over-year basis. Adjusted earnings per share (which strips out many non-recurring items) came in at $3.03, which is down 19% year over year. That said, full-year total net revenue rose 5% to $6.7 billion. For the fourth quarter, the company reported earnings per share of $1.82. This was a significant increase from the third-quarter earnings of $1.26 per share or the $0.99 reported in the fourth quarter of 2019. 

Car keys and auto loan application

Image source: Getty Images.

Credit performance is better than last year at this time

Provisions for credit losses rose 44% year over year to $1.4 billion. For the fourth quarter, provisions were only $100 million. Charge-offs (which means actual loans written off) was 1% of the portfolio. The company expects charge-offs to peak in 2021, but it wouldn't give much guidance on the earnings conference call as to what level was expected. However, Ally does see charge-offs peaking in the second half of 2021 before reverting to normal in 2022 and 2023. While the company believes the current provision of $1.4 billion is enough, it doesn't anticipate releasing any of these reserves back into earnings going forward. The provision will just be worked down by charge-offs. For the auto book, 60-day delinquencies were only 0.58%, which is actually a decrease compared to the fourth quarter of 2019. 

In auto finance, consumer volume was somewhat affected by COVID-19. However, the company originated volume of $35.1 billion, which was a 3% decrease compared to a year ago. In the insurance business, Ally wrote $1.2 billion in premiums during 2020, while the $6.3 billion investment portfolio produced over $200 million of investment income. Ally Home originated $4.7 billion in volume, which was driven by a strong mortgage refinance market. Ally Invest self-directed accounts rose 17%, while assets increased 70%.

The company also announced a quarterly dividend of $0.19 per share and a $1.6 billion stock buyback. Ally has a pretty steady record of dividend increases, and given the current non-GAAP per-share earnings of $3.03, the company has a payout ratio of only 25%. However, the company is expected to earn $4.07 per share in 2021.

Ally Financial certainly has room to increase the dividend. Given the company's forecast for charge-offs peaking in the second half of 2021, Ally may choose to take a wait-and-see approach to increasing the dividend. The dividend yields 1.87%, which is a little bit below the company's historic average. Historically the company keeps a pretty steady payout ratio, so if earnings are better than expected, shareholders will probably get a dividend bump. 

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