Citi reiterated its Buy rating on Ally Financial (NYSE: NYSE:ALLY) with a maintained price target of $50.00. The firm's perspective is that while the market is currently focused on Ally Financial's peak auto credit losses and trough net interest margin (NIM) for the fourth quarter of 2024, the outlook for 2026 is considerably more positive. Citi anticipates a decrease in credit losses to 190 basis points and an increase in NIM to 4% by 2026, presenting what they believe to be an attractive investment opportunity.
The analyst's comments addressed concerns that had been raised about Ally Financial's credit ahead of the quarter, which were based on monthly securitization data. However, this data was deemed a poor indicator, as only 5% of the portfolio is securitized. Furthermore, the performance of the 2023 and 2024 loan vintages has been better than expected, suggesting that the significant credit issues were confined to the 2022 vintage.
Regarding the lower NIM for the fourth quarter of 2024, the analyst attributed it to reduced remarketing gains and a 20 basis point reduction in online savings account (OSA) rates following the Federal Reserve's 50 basis point rate cut. The impact of this rate cut was a 40% beta, which was slightly below the estimated breakeven beta of 44%. The analyst projected that as the cumulative beta approaches 65-70%, Ally Financial will experience a substantial expansion in its NIM.
Citi's analysis suggests that the market's current focus on Ally Financial's short-term challenges may be overshadowing the potential for recovery and growth in the medium term. The firm's maintained Buy rating and price target reflect confidence in Ally Financial's future performance, despite the anticipated peak in auto credit losses and a trough in NIM for the latter part of 2024.
Ally Financial has reported its third-quarter 2024 earnings, revealing an adjusted earnings per share (EPS) of $0.95, significantly influenced by tax credits related to electric vehicle lease volumes. The company managed to originate $9.4 billion in consumer loans in its auto segment, despite facing challenges such as interest rate volatility and inflationary pressures. However, retail deposits saw a decline of $600 million in the quarter.
Barclays (LON:BARC) maintained an Equalweight rating on Ally Financial, with a consistent price target of $36.00. Meanwhile, Raymond James upgraded Ally Financial's stock from Underperform to Market Perform, and BTIG reiterated a Neutral rating on the company.
In other company news, Ally Financial announced a quarterly dividend of $0.30 for Q4 2024. The company's insurance segment reached a record $384 million in premiums, and electric vehicle lease originations accounted for 12% of total origination volume.
InvestingPro Insights
To complement Citi's optimistic outlook on Ally Financial (NYSE: ALLY), recent data from InvestingPro provides additional context for investors. As of the last twelve months ending Q3 2024, Ally's P/E ratio stands at 12.09, suggesting the stock may be undervalued relative to its earnings. This aligns with Citi's view of an attractive investment opportunity.
InvestingPro Tips highlight that Ally has maintained dividend payments for 9 consecutive years, demonstrating a commitment to shareholder returns even during challenging periods. This could be particularly appealing to income-focused investors as the company navigates through the expected peak in auto credit losses.
Despite the anticipated trough in net interest margin, Ally's revenue for the last twelve months ending Q3 2024 was $6.76 billion, with an operating income margin of 12.92%. These figures suggest that the company maintains a solid financial foundation, supporting Citi's projection of improved performance by 2026.
It's worth noting that InvestingPro offers 7 additional tips for Ally Financial, providing a more comprehensive analysis for investors considering this stock. To access these insights and more detailed financial metrics, investors can explore the full range of data available on InvestingPro.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.