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Diversification Aids Ally Financial (ALLY) Amid Cost Woes
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Ally Financial Inc.’s (ALLY - Free Report) efforts to diversify the revenue base, along with the gradual rise in demand for consumer loans and strategic acquisitions, are expected to keep supporting financials. Given a robust capital and liquidity position, the company is expected to sustain efficient capital deployments in the future.
However, elevated expenses (owing to the company’s inorganic growth efforts) will likely hurt the bottom line. Deteriorating credit quality and relatively lower interest rates (despite rate hike expectations) are other concerns.
Analysts also have a neutral stance toward the stock. The Zacks Consensus Estimate for ALLY’s 2022 earnings has been unchanged over the past 30 days. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of ALLY have lost 21.6% compared with the industry’s decline of 19.4%.
Image Source: Zacks Investment Research
Looking at fundamentals, net financing revenues (one of the key sources of revenue) witnessed a compound annual growth rate (CAGR) of 9.9% over the last five years (2017-2021), with the uptrend continuing in first-quarter 2022. Strong origination volumes, retail loan growth and a rise in deposit balances are expected to keep supporting the company’s revenues.
As part of its strategy to diversify into banking products, Ally Financial has forayed into the mortgage business, which is supporting the company’s earnings. It has also been trying to enhance digital offerings and introduce new products to further boost profitability.
Further, its wealth management and online brokerage initiatives related to credit card offerings remain impressive. Acquisitions of Fair Square Financial (a credit card provider), TradeKing and Health Credit Services (a point-of-sale payment provider) will likely help in improving the company’s product offerings.
Ally Financial has come a long way in improving its balance sheet and fundamentals. This has resulted in the company’s robust capital deployment actions. In January 2022, it announced a 20% dividend hike, which followed four hikes — 31.6% in July 2021, 11.8% in January 2020, 13.3% in January 2019 and 15.4% in July 2018. The company also has a share repurchase plan in place. On Jan 11, 2022, the company's board of directors authorized the repurchase of up to $2 billion worth of shares until the year-end.
However, over the last five years (ended 2021), ALLY’s expenses witnessed a CAGR of 7.2%. The rise was mainly due to higher compensation and benefits expenses. The upward trend in expenses continued in first-quarter 2022. With the company launching products, seeking opportunistic buyouts and expanding into newer areas of operations, expenses are expected to remain elevated.
Moreover, although the company’s net charge offs declined in 2020 and 2021, it witnessed a year-over-year rise in the first three months of 2022. Its provision for loan losses has been volatile (increasing in 2020, falling in 2021 and rising again in the first quarter of 2022). Given the rise in demand for consumer loans, provisions are expected to increase in the upcoming quarters. Thus, deteriorating credit quality is expected to dampen the company’s financials.
The consensus estimate for S&T Bancorp’s current-year earnings has been revised 12% upward over the past 60 days. Over the past year, STBA’s share price has declined 13.8%.
Arrow Financial’s current-year earnings estimates have been revised 3.2% upward over the past 60 days. AROW’s shares have lost 8.7% over the past year.
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Diversification Aids Ally Financial (ALLY) Amid Cost Woes
Ally Financial Inc.’s (ALLY - Free Report) efforts to diversify the revenue base, along with the gradual rise in demand for consumer loans and strategic acquisitions, are expected to keep supporting financials. Given a robust capital and liquidity position, the company is expected to sustain efficient capital deployments in the future.
However, elevated expenses (owing to the company’s inorganic growth efforts) will likely hurt the bottom line. Deteriorating credit quality and relatively lower interest rates (despite rate hike expectations) are other concerns.
Analysts also have a neutral stance toward the stock. The Zacks Consensus Estimate for ALLY’s 2022 earnings has been unchanged over the past 30 days. Thus, the company currently carries a Zacks Rank #3 (Hold).
Over the past year, shares of ALLY have lost 21.6% compared with the industry’s decline of 19.4%.
Image Source: Zacks Investment Research
Looking at fundamentals, net financing revenues (one of the key sources of revenue) witnessed a compound annual growth rate (CAGR) of 9.9% over the last five years (2017-2021), with the uptrend continuing in first-quarter 2022. Strong origination volumes, retail loan growth and a rise in deposit balances are expected to keep supporting the company’s revenues.
As part of its strategy to diversify into banking products, Ally Financial has forayed into the mortgage business, which is supporting the company’s earnings. It has also been trying to enhance digital offerings and introduce new products to further boost profitability.
Further, its wealth management and online brokerage initiatives related to credit card offerings remain impressive. Acquisitions of Fair Square Financial (a credit card provider), TradeKing and Health Credit Services (a point-of-sale payment provider) will likely help in improving the company’s product offerings.
Ally Financial has come a long way in improving its balance sheet and fundamentals. This has resulted in the company’s robust capital deployment actions. In January 2022, it announced a 20% dividend hike, which followed four hikes — 31.6% in July 2021, 11.8% in January 2020, 13.3% in January 2019 and 15.4% in July 2018. The company also has a share repurchase plan in place. On Jan 11, 2022, the company's board of directors authorized the repurchase of up to $2 billion worth of shares until the year-end.
However, over the last five years (ended 2021), ALLY’s expenses witnessed a CAGR of 7.2%. The rise was mainly due to higher compensation and benefits expenses. The upward trend in expenses continued in first-quarter 2022. With the company launching products, seeking opportunistic buyouts and expanding into newer areas of operations, expenses are expected to remain elevated.
Moreover, although the company’s net charge offs declined in 2020 and 2021, it witnessed a year-over-year rise in the first three months of 2022. Its provision for loan losses has been volatile (increasing in 2020, falling in 2021 and rising again in the first quarter of 2022). Given the rise in demand for consumer loans, provisions are expected to increase in the upcoming quarters. Thus, deteriorating credit quality is expected to dampen the company’s financials.
Stocks Worth a Look
A couple of better-ranked stocks from the finance space are S&T Bancorp, Inc. (STBA - Free Report) and Arrow Financial Corporation (AROW - Free Report) . Both STBA and AROW currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus estimate for S&T Bancorp’s current-year earnings has been revised 12% upward over the past 60 days. Over the past year, STBA’s share price has declined 13.8%.
Arrow Financial’s current-year earnings estimates have been revised 3.2% upward over the past 60 days. AROW’s shares have lost 8.7% over the past year.