This Bank Was Downgraded by Barclays. Here's What That Means

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KEY POINTS

  • Barclays cited uncertainty in the market and rising interest rates as a concern.
  • A stock downgrade can have a big impact on the short-term price of a stock.

What does this mean for you?

Ally Financial is one of the largest banks in the country, with close to $200 billion in assets and over 11 million customers. Ally is known for its great customer service, low fees, and no-hassle banking experience. But recently, its reputation took a hit when Barclays downgraded it from "Overweight" to "Equal Weight." On top of that, Bank of America (BofA) also downgraded Ally by two notches to "Underperform." So what does this mean for consumers? Here's why Barclays downgraded Ally and how this will affect bank account holders. 

What led to the downgrade? 

According to Barclays, the entire banking sector is expected to face “a slowing economy and possible recession.” As a bank that services lower-end consumers, Barclays sees a darker future for banks like Ally since these consumers are the most vulnerable to high inflation, interest rates, and reduced stimulus funds.

Barclays cut its Ally price target from $40 to $33 and BofA cut its price target even more, to $26. According to Bank of America analyst Brandon Berman, "Rising interest rates are pushing funding costs higher while simultaneously causing loan demand to slow. Moreover, we think investors will need to see evidence of credit quality performing better than expected before rewarding shares."

The stock market, including Ally Financial, has been volatile since the start of 2022. In the past 12 months, Ally Financial shares hit a record all-time high of $53.83 and in late December dropped by 50%, hitting a low of $22.34. Due to loan growth slowing and loan losses increasing, Barclays believes the bank is even more vulnerable this year.

How will this affect customers? 

For existing customers of Ally Financial, there should not be any major changes in terms of customer service or product offerings. Upgrades and downgrades by stock analysts help give investors insight into a stock's performance. An upgrade means the analyst is optimistic about the stock's prospects. A downgrade means the analyst is pessimistic about the stock's prospects.

Downgrades typically occur in reaction to company news, expectations, earnings, and more. Downgrades and upgrades typically have an impact on the stock price in the short-term. It doesn't necessarily reflect only the health of a company, but if the current stock price is justified based on its fundamental and technical analysis in the short-term. On the day Ally Financial was downgraded, the stock dropped by 4%. However, since then the stock has rallied by 20%.

Ally Financial is FDIC-insured, which covers $250,000 per depositor and each account ownership activity. While it is unlikely the bank will fail, you can open accounts at different banks or in different ownership categories at Ally to maximize your insurance coverage. Additionally, customers may want to look into other banks if they are offering better products or rates than Ally Financial. 

Overall, while the recent downgrade by Barclays may be concerning for some investors and customers alike, it does not necessarily reflect poorly on the bank itself or its product offerings -- at least in the short-term. That being said, customers should remain vigilant and keep an eye on any potential changes. By doing so they can ensure they are getting the best possible value from their financial institution.

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