Ally Financial is not in as good shape as stock analysts suggest
Zacks Stock Research, Piper sandler, and Goldman Sachs
Ally Financial has worked to diversify its revenue by expanding its digital offerings and introducing new products. Still, the company’s adjusted revenue declined for a second consecutive quarter. Her second trimester net revenue of $ 241 million was a significant improvement over its loss of $ 319 million in the first quarter. However, the company reduced its loan loss provisions by almost 70%. I would like much more transparency to see if such a reduction in loan loss provisions is warranted. Additionally, its performance was impacted by a 26% year-on-year decline in retail auto loan origination as well as a sequential decline of more than $ 10 billion in dealer floor plans due to lower sales. dealer stocks. Essentially, Ally ran out of income to make up for the rising cost of credit.
According to R. Christopher Whalen, chairman of Whalen Global Advisors and previously head of research at Kroll Bond Ratings Agency, Ally Financial suffers from “poor equity market performance, wide credit spreads, low funding profile and lack of clarity in terms of a future business model ”. Whalen also believes that “the market valuation, as usual, is correct, as illustrated by the fact that ALLY is trading at just over half of book value. Like most banks, ALLY’s common stock is down 30% year-to-date. “
Whalen’s analysis also highlights the importance of looking at market signals that are more dynamic than relying solely on financials or ratings. “A review of public references suggests that ALLY’s performance is poor,” Whalen said. Analyze data according to CapIQ, Whalen pointed out that Ally Financial “trades at a multiple of book value of equity ~ 0.6x and ALLY has a beta of 1.6 times the average market volatility and a dividend yield at 3.25% term. As of September 25e, Ally had an implied credit default swap (CDS) spread of 132 basis points on the curve; that’s double the spread for the largest US banks. This means that market investors are worried about an increasing likelihood of default by Ally Financial bonds. The CDS spread generated by Bloomberg is roughly the rating agency equivalent of around + BB plus.
Ratings are currently lagging behind the market’s implicit rating. However, since rating agencies think of bond investors above all, they are more critical of Ally’s financial situation than stock analysts. Fitch Ratings has a current rating of BBB- and a negative outlook on Ally Financial. According to analysts at Fitch Ratings, “Ally’s ratings remain supported by a strong franchise, a leading position in the US auto finance market, a strong track record in credit performance, a diversified funding base, liquidity. abundant, adequate risk-adjusted capitalization and a seasoned management team ”. Still, analysts say Ally Financial is constrained by its “concentrated, cyclical business model and higher price sensitivity on internet-sourced deposits compared to branch-based banks.”
Already in April, DBRS Morningstar had confirmed Ally Financial’s long-term issuer rating of BBB (low) and short-term issuer rating of R-3. DBRS has revised its outlook on Ally’s long-term ratings from positive to negative, and revised its outlook for short-term ratings from positive to stable. The outlook revisions took into account the “sudden and severe economic downturn” linked to the coronavirus pandemic and the expectation that this would negatively impact Ally’s financial results. DBRS Morningstar expects “significant pressure on profitability” from the “dramatic decline” in auto loan origination and deterioration in the company’s credit quality.
As Whalen points out, “ALLY has lower gross spreads on its loans and higher funding costs than the big banks.” FFIEC data shows that ALLY ranked below its peer group on this key measure of profitability and asset returns. Emptor Warning!
Note: Ally Financial will publish its third quarter financial statements October 16e.