Ally Financial Earnings: Lower Net Interest Margins Continue to Hurt Results While Credit Costs Rise

No-moat Ally Financial ALLY reported third-quarter earnings that were largely in line with our expectations, as deteriorating consumer credit and higher interest rates continue to pressure results. Net revenue decreased 2% from last year and 5% from last quarter to $1.97 billion. Earnings per share were flat at $0.88, which translates to a return on equity of 9.9%. However, this includes a tax benefit of $94 million, or $0.31 per share, during the quarter. As we incorporate these results, we do not plan to materially alter our $39 fair value estimate. We see the shares as undervalued on a full-cycle basis.

Net interest margin compression continues to be an issue for Ally, with the bank’s NIM falling to 3.26% from 3.83% last year and 3.41% last quarter. The lower NIM caused net financing revenue to fall 10.8% from last year to $1.5 billion, despite the loan book growing 6.3% over the same period. Rising interest rates are causing Ally’s funding costs to rise faster than its asset yield. However, we expect the firm’s NIM is at or near a trough as we reach the tail end of the Federal Reserve’s tightening cycle. As Ally’s loans roll off into new higher-yielding receivables, we expect the downward pressure on net interest income to improve and margins to begin to recover in 2024.

Ally’s results were also pressured by rising credit costs, with firmwide net charge-offs rising to 1.31% of total loans from 0.85% last year. The increase was primarily due to auto loans, whose net charge-off rate rose to 1.85% from 1.05% last year. We expect net charge-offs to rise further, with the bank’s 30-day auto delinquency rate also increasing sequentially to 3.85% from 3.60%. That said, used-car prices, which determine the value of the bank’s collateral, continue to be more resilient than we had initially expected, which will help mitigate the worst of the bank’s credit losses in the near term.