On Tuesday, RBC Capital reinstated coverage on Ally Financial (NYSE: NYSE:ALLY) with an Outperform rating and a price target of $49.00. The company faces credit headwinds that are impacting near-term performance, with management expecting higher delinquencies and net charge-offs (NCOs) for the third quarter due to pressures on their 2023 vintage.
Despite the challenges, including a recent uptick in retail auto delinquencies and NCOs for July and August, the analyst believes these issues are manageable.
Management has not revised their guidance but suggested that the reserve rate at quarter-end could increase, hinting at a potential rise in the formal guide for NCOs. The full-year 2024 guidance previously forecasted retail NCOs of approximately 2.1% and consolidated NCOs of 1.45% to 1.50%. The company's commentary reflects a slight increase from earlier expectations but is still seen as manageable relative to prior guidance.
Ally Financial also revised its margin outlook, now expecting a sequential decline for the third quarter, contrasting with previous guidance anticipating a marginal increase. This change is attributed to factors such as lower leasing activity and the timing of deposit repricing, which may not align with potential rate decreases. Nonetheless, the fundamental drivers for margin expansion remain intact, with loan yields maintaining at 10.5% or above.
The company had previously indicated a target margin of 3.45% to 3.50% by the end of 2024, starting from a 2Q margin of 3.30%. While the near-term margin outlook has declined, management's long-term expectations, including achieving a 15% return on tangible common equity (ROTCE), remain unchanged, although the timeline to reach this goal may be extended due to current headwinds.
RBC Capital's coverage reinstatement comes with the perspective that while Ally Financial is experiencing near-term challenges in credit costs and margins, the company's long-term fundamentals are positive. The stock may face pressure today due to these updates, but overall, the outlook remains optimistic with a notable price target increase.
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