Ally Financial (ALLY 0.03%) has underperformed the market over the past year, with fears of rising defaults and demand concerns weighing on the bank's stock. However, the company just announced some big moves, and 2025 could be a major inflection point for this business.
Not only is Ally refocusing its efforts on its core businesses, but the company could be a big beneficiary of Federal Reserve interest rate cuts. With the bank stock trading at a cheaper valuation than most of its peers, now could be a good time to take a closer look.
Ally is focusing on its core business
Along with its fourth-quarter earnings report, Ally announced that it plans to refocus its efforts on its core businesses of dealer financing, corporate financing, and consumer banking.
NYSE: ALLY
Key Data Points
As part of this, Ally is selling its $2.3 billion credit card portfolio to CardWorks and is no longer accepting new mortgage applications after Jan. 31. The company also completed a workforce reduction recently, which it expects to result in $60 million in cost savings annually.
It isn't difficult to see why Ally might want to focus on its core business lines. It is a market leader in new auto financing, and its average yield on a newly originated auto loan in 2024 was 10.4%, despite strong overall credit quality. And while there were concerns about demand heading into 2024, Ally's application volume increased by 6% year over year.
Ally's insurance business is performing quite well also, and it had its highest quarter of earned premiums since the IPO in the fourth quarter of 2024. On the retail side, Ally has $143 billion in consumer balances and a 95% customer retention rate.
Recent results look strong. In the fourth quarter, Ally beat expectations on both the top and bottom lines. Its net interest margin ticked upward by one basis point sequentially, and investors seem to be cheering the disposal of the riskier credit card business.
However, it's important to note that the credit card business is a relatively small part of the company, and Ally expects profitability to improve in 2025. Here are two key points from Ally's 2025 guidance:
- The company is expecting a net interest margin (NIM) in the 3.4%-3.5% range, even after the sale of the high-interest credit card business. For context, Ally's NIM for the fourth quarter was 3.33%.
- Ally expects an automotive net charge-off (NCO) rate of 2% to 2.25% in 2025, which would be a significant improvement over the 2.34% NCO rate in the fourth quarter.
Big tailwinds for 2025 and beyond
Looking ahead, Ally could be a major beneficiary as interest rates start to come down. Not only does Ally's deposit cost move lower as the Fed cuts rates, but lower interest rates are typically accompanied by higher demand for auto loans.
There are also potential tailwinds from the policies of the Trump administration. President Trump generally favors less regulation and actually issued an executive order freezing new regulations on day one of his presidency. Plus, Trump campaigned on a 15% corporate tax rate, and Ally could be a big beneficiary, as the bank expects a 22%-23% effective tax rate in 2025.
The bottom line is that Ally is making smart moves, and 2025 could bring an excellent environment for its business. With the stock trading for slightly less than its book value, now could be a great time to take a closer look.
