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Zacks Industry Outlook Highlights Ally Financial, Mr. Cooper and SLM
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For Immediate Release
Chicago, IL – August 13, 2024 – Today, Zacks Equity Research discusses Ally Financial Inc. (ALLY - Free Report) , Mr. Cooper Group Inc. (COOP - Free Report) and SLM Corp. (SLM - Free Report) .
The Zacks Consumer Loans industry continues to witness weakening asset quality. The companies are also bearing the brunt of inflation, higher rates and expectations of economic slowdown.
Though the Federal Reserve plans to cut rates as soon as September, consumers understand that high interest rates are here to stay for some time, and demand for the loans is likely to witness modest improvement. Easing lending standards, stabilizing consumer sentiments and digitization of operations will aid consumer loan providers. So, industry players like Ally Financial Inc., Mr. Cooper Group Inc. and SLM Corp. are worth considering right now.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues.
Prospects of the companies in this industry are highly sensitive to the nation's overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Themes Influencing the Consumer Loan Industry
Interest Rate Cuts & Loan Demand: The interest rates are currently at a 23-year high of 5.25-5.5%. As the inflation is cooling down and the job market is weakening, the Federal Reserve has signaled rate cuts beginning in September. Thus, this is expected to lead to a rise in loan demand, though the persistently high inflation and other macroeconomic headwinds continue to weigh on consumer sentiments.
The Conference Board Consumer Confidence Index rose in July. Dana M. Peterson, Chief Economist at The Conference Board, said, "Confidence increased in July, but not enough to break free of the narrow range that has prevailed over the past two years."
Also, the Expectations Index — based on consumers' short-term outlook for income, business and labor market conditions — improved in July to 78.2 from 72.8 in June. This will result in a modest rise in demand for consumer loans. Thus, industry players are expected to record some growth in net interest margin (NIM) and NII.
Lending Standards: With the nation's big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards is helping consumer loan providers meet loan demand.
Asset Quality: For the major part of 2020, consumer loan providers built additional provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. However, with solid economic growth and support from government stimulus packages, industry players began to release these reserves back into the income statement.
Now again, macroeconomic headwinds, including expectations of economic downturn, will likely curtail consumers' ability to repay loans. Thus, consumer loan providers are building additional reserves to counter any fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players' asset quality, and several credit quality metrics have crept up above pre-pandemic levels.
Zacks Industry Rank Reflects Positive Picture
The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a handful of stocks that you may want to bet on, take a look at the industry's recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has outperformed both the Zacks S&P 500 composite and its sector over the past year.
The stocks in this industry have collectively jumped 22.6% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 18.7% and 18.5%, respectively.
Industry Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-book ratio (P/B), commonly used for valuing consumer loan stocks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/B of 0.90X, above the median level of 0.88X, over the past five years. This compares with the highest level of 1.22X and the lowest level of 0.38X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/B ratio for the S&P 500 is 7.71X and the median level is 7.72X.
As finance stocks typically have a lower P/B, comparing consumer loan providers with the S&P 500 may not make sense to many investors. However, a comparison of the group's P/B ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's trailing 12-month P/B of 3.10X for the same period is way above the Zacks Consumer Loan industry's ratio.
3 Consumer Loan Stocks Worth Investing
Ally Financial: Detroit, MI-based Ally Financial is a diversified financial services company providing a broad array of financial products and services, primarily to automotive dealers and their customers. Ally Bank is an indirect, wholly-owned banking subsidiary of Ally Financial.
Growth in one of the key sources of revenues – net financing revenues – remains a major positive for Ally Financial. Given strong origination volumes and retail loan growth, the company is expected to continue witnessing a rise in the metric in the quarters ahead.
As part of its strategy to diversify, Ally Financial is expanding into the mortgage business, wealth management and online brokerage. The company has been taking initiatives to enhance digital offerings and introduce new products to boost profitability. Also, to optimize its capital allocation and prioritize resources toward high-growth areas, the company sold its point-of-sale financing business – Ally Lending – in March 2024.
In the past year, shares of this Zacks Rank #2 (Buy) company have jumped 43.3%. Over the past month, the Zacks Consensus Estimate for its earnings has moved 17.4% and 8.3% north for 2024 and 2025, respectively.
Cooper Group: Headquartered in Coppell, TX, the company is engaged in non-banking services for mortgage loans. The company operates through its primary brands — Mr. Cooper and Xome.
Though the demand for mortgages is subdued now due to higher rates, COOP is well-placed to leverage its scale (it is one of the largest non-bank mortgage servicers in the United States) and bolster its top-line growth. Further, the strategic acquisitions of Home Point Capital Inc. and Roosevelt Management Company, LLC in 2023 will boost the company's servicing business.
With the Federal Reserve likely to keep interest rates high in the near term to control inflation, this Zacks Rank #1 (Strong Buy) company's NII and NIM are expected to witness improvements, though rising funding costs will weigh on both. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for the company's earnings for 2024 and 2025 has moved 5.1% and 17.2% upward, respectively, over the past 30 days. Also, COOP shares have surged 52.1% over the past year.
SLM Corporation: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company is focused on catering to private education loans, and providing savings and insurance products for higher education to students and families.
The expectation of modest growth in enrollment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company's prospects. SLM remains focused on boosting its private student loan business, maintaining a strong capital position and introducing multiple complementary products,
Further, the company is focused on expanding its operations on the back of investments in varied product offerings and inorganic activities. Such moves are likely to aid SLM in becoming a holistic education solutions provider for students and drive loan originations.
Sallie Mae has been focused on improving its NII by increasing the amount of cash and cash equivalents held in order to gain from yields on cash and other short-term investments. The rising average loan balance will support NII growth. The company's target to grow the Private Education Loan portfolio will continue to support its NII.
Shares of this Zacks Rank #2 company have jumped 39.2% over the past year. Over the past month, the Zacks Consensus Estimate for earnings has moved 1.1% and 1% north for 2024 and 2025, respectively.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Ally Financial, Mr. Cooper and SLM
For Immediate Release
Chicago, IL – August 13, 2024 – Today, Zacks Equity Research discusses Ally Financial Inc. (ALLY - Free Report) , Mr. Cooper Group Inc. (COOP - Free Report) and SLM Corp. (SLM - Free Report) .
Industry: Consumer Loans
Link: https://www.zacks.com/commentary/2320504/buy-these-3-consumer-loan-stocks-from-a-prospering-industry
The Zacks Consumer Loans industry continues to witness weakening asset quality. The companies are also bearing the brunt of inflation, higher rates and expectations of economic slowdown.
Though the Federal Reserve plans to cut rates as soon as September, consumers understand that high interest rates are here to stay for some time, and demand for the loans is likely to witness modest improvement. Easing lending standards, stabilizing consumer sentiments and digitization of operations will aid consumer loan providers. So, industry players like Ally Financial Inc., Mr. Cooper Group Inc. and SLM Corp. are worth considering right now.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues.
Prospects of the companies in this industry are highly sensitive to the nation's overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Themes Influencing the Consumer Loan Industry
Interest Rate Cuts & Loan Demand: The interest rates are currently at a 23-year high of 5.25-5.5%. As the inflation is cooling down and the job market is weakening, the Federal Reserve has signaled rate cuts beginning in September. Thus, this is expected to lead to a rise in loan demand, though the persistently high inflation and other macroeconomic headwinds continue to weigh on consumer sentiments.
The Conference Board Consumer Confidence Index rose in July. Dana M. Peterson, Chief Economist at The Conference Board, said, "Confidence increased in July, but not enough to break free of the narrow range that has prevailed over the past two years."
Also, the Expectations Index — based on consumers' short-term outlook for income, business and labor market conditions — improved in July to 78.2 from 72.8 in June. This will result in a modest rise in demand for consumer loans. Thus, industry players are expected to record some growth in net interest margin (NIM) and NII.
Lending Standards: With the nation's big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards is helping consumer loan providers meet loan demand.
Asset Quality: For the major part of 2020, consumer loan providers built additional provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. However, with solid economic growth and support from government stimulus packages, industry players began to release these reserves back into the income statement.
Now again, macroeconomic headwinds, including expectations of economic downturn, will likely curtail consumers' ability to repay loans. Thus, consumer loan providers are building additional reserves to counter any fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players' asset quality, and several credit quality metrics have crept up above pre-pandemic levels.
Zacks Industry Rank Reflects Positive Picture
The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #41, which places it in the top 16% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a handful of stocks that you may want to bet on, take a look at the industry's recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has outperformed both the Zacks S&P 500 composite and its sector over the past year.
The stocks in this industry have collectively jumped 22.6% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 18.7% and 18.5%, respectively.
Industry Valuation
One might get a good sense of the industry's relative valuation by looking at its price-to-book ratio (P/B), commonly used for valuing consumer loan stocks because of significant variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/B of 0.90X, above the median level of 0.88X, over the past five years. This compares with the highest level of 1.22X and the lowest level of 0.38X over this period. The industry is trading at a considerable discount when compared with the market at large, as the trailing 12-month P/B ratio for the S&P 500 is 7.71X and the median level is 7.72X.
As finance stocks typically have a lower P/B, comparing consumer loan providers with the S&P 500 may not make sense to many investors. However, a comparison of the group's P/B ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector's trailing 12-month P/B of 3.10X for the same period is way above the Zacks Consumer Loan industry's ratio.
3 Consumer Loan Stocks Worth Investing
Ally Financial: Detroit, MI-based Ally Financial is a diversified financial services company providing a broad array of financial products and services, primarily to automotive dealers and their customers. Ally Bank is an indirect, wholly-owned banking subsidiary of Ally Financial.
Growth in one of the key sources of revenues – net financing revenues – remains a major positive for Ally Financial. Given strong origination volumes and retail loan growth, the company is expected to continue witnessing a rise in the metric in the quarters ahead.
As part of its strategy to diversify, Ally Financial is expanding into the mortgage business, wealth management and online brokerage. The company has been taking initiatives to enhance digital offerings and introduce new products to boost profitability. Also, to optimize its capital allocation and prioritize resources toward high-growth areas, the company sold its point-of-sale financing business – Ally Lending – in March 2024.
In the past year, shares of this Zacks Rank #2 (Buy) company have jumped 43.3%. Over the past month, the Zacks Consensus Estimate for its earnings has moved 17.4% and 8.3% north for 2024 and 2025, respectively.
Cooper Group: Headquartered in Coppell, TX, the company is engaged in non-banking services for mortgage loans. The company operates through its primary brands — Mr. Cooper and Xome.
Though the demand for mortgages is subdued now due to higher rates, COOP is well-placed to leverage its scale (it is one of the largest non-bank mortgage servicers in the United States) and bolster its top-line growth. Further, the strategic acquisitions of Home Point Capital Inc. and Roosevelt Management Company, LLC in 2023 will boost the company's servicing business.
With the Federal Reserve likely to keep interest rates high in the near term to control inflation, this Zacks Rank #1 (Strong Buy) company's NII and NIM are expected to witness improvements, though rising funding costs will weigh on both. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for the company's earnings for 2024 and 2025 has moved 5.1% and 17.2% upward, respectively, over the past 30 days. Also, COOP shares have surged 52.1% over the past year.
SLM Corporation: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. This Newark, DE-based company is focused on catering to private education loans, and providing savings and insurance products for higher education to students and families.
The expectation of modest growth in enrollment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company's prospects. SLM remains focused on boosting its private student loan business, maintaining a strong capital position and introducing multiple complementary products,
Further, the company is focused on expanding its operations on the back of investments in varied product offerings and inorganic activities. Such moves are likely to aid SLM in becoming a holistic education solutions provider for students and drive loan originations.
Sallie Mae has been focused on improving its NII by increasing the amount of cash and cash equivalents held in order to gain from yields on cash and other short-term investments. The rising average loan balance will support NII growth. The company's target to grow the Private Education Loan portfolio will continue to support its NII.
Shares of this Zacks Rank #2 company have jumped 39.2% over the past year. Over the past month, the Zacks Consensus Estimate for earnings has moved 1.1% and 1% north for 2024 and 2025, respectively.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.