Where Will Ally Stock Be in 1 Year?

It's tough to be a bank stock these days. Banks are particularly sensitive to economic trends and policy, and those are changing frequently, and not necessarily in banks' favor. Already in 2023, has three relatively important banks have failed. 

Does that mean investors can have confidence in the ones that remain standing? In general, larger banks tend to have substantial advantages over small ones. But each bank is really its own story. Ally Financial (ALLY 0.41%) is the 23rd-largest bank in the U.S., with $186 billion in assets, putting it on the lower side of large banks. Its first-quarter financials showed an overall decline from last year, but were mostly as expected. In fact, despite the harsh climate and ho-hum performance, Wall Street sees a target price as high as 78% more than today for Ally stock. What can investors expect in the short term, and where will Ally be in a year?

An old company making a new splash

Ally is actually more than 100 yeas old. It was created as a financial arm of General Motors to help auto dealers finance auto sales, and over many decades it expanded into other areas of lending and finance. It rebranded as Ally in 2010 and became a seperate public company in 2014.

It was forward-thinking at that time. It has no physical branches and functions completely online, and it positions itself as a customer-friendly bank with affordable financial services, aided by its long history of providing clients with auto financing and other consumer services. This combination of a century of financial experience, modern banking solutions, and a customer focus has led to high growth. It's also captured famed investor Warren Buffett's attention, and he bought shares over two quarters last year. Whenever Buffett buys a stock it gets immediate market attention, and Buffett's interest in Ally has made it a stock to watch.

What's been happening over at Ally

Ally has certain qualities that make it resilient in challenging times. Its customer focus and digital services make it an attractive option for personal accounts, and it added 126,000 customers in the 2023 first quarter. Customer deposit accounts increased 12% over last year to 2.8 million, and it has a 96% customer retention rate.

Ally's average customer balance is $50,000, and 91% of its accounts are insured by the Federal Deposit Insurance Corp. Those became important pieces of information to know in light of the bank failures earlier this year, in which many accounts with high balances were not insured.

Ally's sweet spot is still auto lending, and it had 3.3 million auto loan applications and originated $9.5 billion in auto loans in the first quarter.

Those were the good parts. Here are some of the challenges. Earnings per share (EPS) decreased from $1.86 to $0.96, driven by increased funding costs and increased provisions for losses. Return on common equity decreased from 18% to 10.8%. Net revenue was little changed.

Aside from the above positives of the quarter, there were other indications of consumer adoption and engagement. Ally credit card balances increased from $1.2 billion last year to $1.6 billion this year, and the percentage of new Ally investing accounts that came from existing Ally accounts increased from 79% to 86%.

Although banks get hit by higher interest rates with lower loan originations and higher default rates, they benefit from higher interest rates on loans as well. In the auto lending segment, the originated yield increased from 7.07% last year to 10.9% this year.

Why does Buffett like it?

Buffett is known to love bank stocks. They have tons of cash and, if run well, are usually very stable and reliable. They also usually pay dividends, itself an attractive quality, which also shows commitment to shareholders.

Buffett actually downsized his position in Ally in the quarter. But most of what Ally demonstrated in the first quarter can explain why it's a classic Buffett stock. It's resilient and should easily ride this wave of macroeconomic challenge, and its dividend yields a juicy 4.6%.

Ally stock is up a modest 8% this year, and at this price, it trades at 6.4 times trailing-12-month earnings.

At this time next year, it may still be posting similarly lackluster financials if the Federal Reserve keeps raising interest rates. If the economic landscape shifts, it should demonstrate improved performance. Either way, it's likely to keep gaining customers. The stock price in the short term will reflect the overall financial performance, but over time Ally should be a resilient value stock.