To say that Warren Buffett is fond of bank stocks would be a bit of an understatement. Berkshire Hathaway's second-biggest holding, behind only Apple, is Bank of America. The conglomerate also has a sizable position in Citigroup. 

Constituting just 0.2% of the portfolio as of year-end 2022, Ally Financial (ALLY -0.43%) is one of Buffett's holdings that investors might not be aware of. The digital bank recently reported results that disappointed Wall Street, as shares are down about 6% since the earnings release (as of April 24). What's more, Ally is down nearly 40% in the past year. 

Should you buy the dip? 

Navigating challenging times 

During the first three months of 2023, Ally's revenue of $2.1 billion was essentially flat with the year-ago period. However, the business reported diluted earnings per share (EPS) of $0.96, down 48% from $1.86 in the year-ago period. This number missed Wall Street expectations, and it spurred a mild sell-off of Ally's shares. 

Anyone even remotely following the economy over the past year who has a general understanding of how financial institutions work would understand what's going on. The Federal Reserve's aggressive rate-hiking policy, put in place to curb soaring inflation, has quickly changed the operating environment for banks. When interest rates are higher, the risk that borrowers default on their obligations increases. That's because more of an individual's budget would need to go toward servicing that debt. This unfavorable situation has forced Ally to make a $446 million provision for credit losses in the first quarter, a direct hit to earnings. 

In other words, management is setting extra capital aside to prepare for rough seas in the near term. "We expect increases in delinquencies and continue to monitor the cumulative impact of inflation on consumers," CFO Brad Brown noted on the Q1 2023 earnings call. It's also worth pointing out that Ally's net charge-offs of $409 million last quarter were a huge jump from $133 million in the first quarter of 2022. 

Because Ally's asset portfolio consists primarily of retail auto loans, which made up 57% of the overall loan and lease portfolio as of March 31, the company is overly exposed to this sector of the economy. According to data from Cox Automotive, the number of consumers behind on their car payments is skyrocketing. This could mean even greater losses for Ally over the rest of 2023. 

Reasons to like the stock 

Despite the difficulties that Ally Financial has been facing, investors might still find reasons to like the stock. For starters, the valuation looks dirt cheap. Ally's shares are down 38% over the past year and 7% in the last five years, so this has undoubtedly been a losing bet for investors. And they sell at a price-to-earnings (P/E) ratio of 6.3 (as of April 24). This valuation is cheaper than the trailing three-, five-, and 10-year P/E multiples of the stock. 

Ally also pays a quarterly dividend of $0.30 per share, good for a yield of almost 5%. This dividend payout has steadily increased from just $0.08 per share in 2016. This boosts returns, something income-seeking investors would appreciate. 

Another important advantage Ally has is its deposit base. Of the $138.5 billion of retail deposits, 91% are FDIC insured. And amid the banking turmoil that characterized the first quarter for the industry, Ally's 126,000 net new deposit customers was a record for the business. "The portfolio in total has an average account balance of approximately $50,000, and our customer-centric approach continues to resonate, evidenced by 96% customer retention," CEO Jeff Brown said on the earnings call. 

This sticky customer base might be enough for investors to jump into the stock, alleviating worries about Ally's ability to navigate the uncertain economic environment. The cheap valuation also adds some upside, which might make it a smart move to buy this Buffett stock on the dip.