Ally Financial (ALLY +0.89%) is having a strong start to 2025, with shares up by 8% for the year as of Feb 19. However, the stock is still trading about 15% below its 52-week high and is more than 30% below its 2021 all-time peak.
To be sure, there are some good reasons why Ally's stock has been under pressure in recent years. But there is also a lot to like about the business, and there are some interesting tailwinds that could help it outperform the market over the next few years.
A market leader with a renewed focus
If you aren't familiar with Ally, its core business is auto lending. It spun off from General Motors (GM 1.33%) in the wake of the financial crisis and now operates as an independent and online-based bank with $143 billion in retail deposits, an investment platform, and more.
NYSE: ALLY
Key Data Points
In fact, Ally is the largest indirect auto lender in the United States (meaning that it isn't owned by an automaker, as Toyota Financial Services is, for example). In 2024, Ally originated $39.2 billion in auto loans at an average yield of 10.4%. It also has a large insurance business and wrote nearly $1.5 billion in auto insurance premiums last year.
Ally is a highly profitable business, with a 3.3% net interest margin (higher than most large banks) and more than $1 billion in core pre-tax income in 2024.
Recently, Ally made the decision to exit some of its non-core business lines to focus on its main franchises. It decided to sell its credit card business and stopped accepting new mortgage loan applications after January. It also expects to achieve more than $60 million in annual savings from recent efficiency improvements.
Looking forward, Ally's focus will be on its dealer financial services business (auto loans and insurance), corporate finance, and its all-digital consumer bank. These are areas where Ally has excellent market positions and competitive advantages, while credit cards and mortgages have been a relatively small part of the business. The company believes that it can significantly increase its net interest margin to the 4% range in the medium term, which would have a big positive impact on the bottom line.
Some risk factors to keep in mind
To be sure, Ally isn't without risk. Its net charge-off (loan default) rate has increased significantly for two consecutive quarters, and while it isn't exactly at an alarming level just yet, it's important to keep an eye on. The percent of Ally's auto loan portfolio that is at least 30 days delinquent is up from 4.66% at the end of the first quarter of 2024 to 5.46% in the fourth quarter.
Ally's more recent loans have generally higher credit quality. For example, the average FICO score of an Ally borrower in 2024 was 24 points higher than the average in 2022. Plus, the average payment makes up a lower percentage of borrowers' income than it did just a couple of years ago. This should help mitigate losses going forward, but it's still important to watch.
Tailwinds that could give Ally a boost
As a final thought, now could be an especially good time to consider Ally, as several tailwinds could impact the business – and bank stocks in general-in a positive way over the next few years.
The most obvious is falling interest rates. While it looks like the pace of Federal Reserve interest rate cuts will be slower than initially expected, the most likely direction over the next few years is downward. Ally's average yield from earning assets is 7.22% while its deposit cost is just over 4%. Lower interest rates should cause the latter to decline, leading to margin expansion.
In addition, the new Trump administration is clearly in favor of loosening regulations on banks and has also discussed lowering the corporate tax rate to 15%. Ally had an effective tax rate of about 20% in 2024, so this could also potentially provide a profit boost.
