Why Shares of Ally Financial Stock Slumped This Week

What happened

Shares of Ally Financial (ALLY 0.13%) have slumped as much as 14% this week, according to data from S&P Global Market Intelligence. The automotive lender and online consumer bank is feeling pain along with the rest of the banking sector in the wake of Silicon Valley Bank's collapse. At 11:00 AM EST on Friday, March 17, Ally stock was down almost 30% over the past month. 

So what

Silicon Valley Bank collapsed for numerous reasons. Management had a misguided strategy of parking its undiversified venture capital deposits in long-dated Treasuries and mortgage-backed securities. After the value of these assets fell in 2022 with rising interest rates, the bank would have had to take major losses on its loan book when trying to fulfill tens of billions in withdrawal requests last week. Add on the fact that the majority of its deposits were uninsured by the FDIC, and it is unsurprising that Silicon Valley Bank failed.

Are investors worried the same might happen to Ally? Maybe. But if they are, I think those fears are misguided. For one, Ally Financial has a much more diversified consumer deposit base across the country; Silicon Valley Bank was focused almost solely on the technology and start-up markets. Ally Financial also has almost 90% of its customer deposits insured by the FDIC, according to management. Those two facts make the likelihood of a bank run much lower at Ally Financial than they were at Silicon Valley Bank.

Now what

Ally Financial seems much safer than Silicon Valley Bank. But investors should remember that it is still a bank. It originates loans for the automotive market, which has gone through wild swings since the start of the COVID-19 pandemic in 2020. As used car prices rose at the fastest rate in history in 2021, Ally's earnings rose because the value of the collateral on its loan book soared.

If used car prices reverse, Ally's profits will reverse as well. But the company has shown no signs of fleeing depositors and should be able to manage through short-term volatility in the automotive market, even if that hurts earnings in 2023 and 2024. If you are interested in bank stocks and if you are a believer in the long-term viability of this consumer bank and automotive lender, now could be a good time to buy shares of Ally Financial on the cheap. Just remember that they don't come without risk.