Should you buy Ally Financial after its poor performance?

Many economists and market experts have called 2024 a transition year – the year when the volatility caused by the pandemic begins to subside and things begin to return to some degree of normality.

We’ve seen this shift in corporate America, with companies including PayPal (NASDAQ:PYPL), Morgan Stanley (NYSE:MS), JetBlue (NASDAQ:JBLU), and Discover Financial (NYSE:DFS). Everyone welcome the new CEO. Now you can add it. alliance finance (NYSE:ALLY) joins a growing list of companies that are transitioning into online banks specializing in auto loans.

Ally reported its fourth quarter and 2023 results on Friday, and the report shows the company is in a transition period with several major moves. Investors reacted positively to the news, with the company’s shares rising about 9% on Friday.

Alliance Loan Sale business

The headline news from the earnings report was that Ally beat analysts’ estimates, but revenue was down significantly from the previous year.

The bank reported revenue of $2.1 billion in the quarter, down 4% from the same quarter last year. However, net income plunged 73% year over year to $76 million, or $49 million, after dividend payments.

There were three key factors that impacted Ally’s earnings, including an increase in credit loss provisions of approximately $100 million to $597 million. This item has been strengthened to account for the greater likelihood of loan default given the expected weak economic environment.

Two other costs were also included in Ally’s “repositioning” line item, which totaled $187 million, up $130 million from the previous year. This included a special assessment by the Federal Deposit Insurance Corporation (FDIC) of $38 million levied to replenish deposit insurance funds depleted after the financial crisis last spring. That line item also includes costs associated with the just-announced sale of the Ally Lending business. Combined, these two cost items reduced revenue by approximately $230 million.

Ally Lending, the company’s POS financing business, was sold to Synchrony (NYSE: SYF). The transaction includes $2.2 billion in loan receivables through relationships with nearly 2,500 merchants and 450,000 active borrowers in the home improvement services and healthcare sectors.

From Ally’s perspective, sales serves two roles. First, we can refocus our strategy and investments around our market-leading auto lending business. Auto loans and leases make up the majority of Ally’s book of business, followed by mortgages. Ally Lending is only a small part of the lending business.

Second, the sale will rationalize costs for lenders and improve liquidity, adding approximately 15 basis points to the Common Equity Tier 1 ratio (CET1), which is currently 9.4%. Ally’s regulatory requirement is 7%, so the extra liquidity provides a little extra padding.

CEO Jeff Brown said in the earnings report that the deal “will be modestly accretive to earnings per share and material book value.” “These actions are a continuation of our strategic priorities to invest resources in our growing business and strengthen our relationships with our consumer and dealer customers.”

New beginning

The sale of Ally Lending shows Ally Financial is refocusing its resources on growing and diversifying its “scale business,” which includes auto lending. The company has a long and successful history in this space, growing out of the old GMAC Bank, which was founded in 1919 by General Motors (NYSE: GM) to finance automobile loans.

Ally Financial is also preparing to appoint a new CEO, with Brown leaving the position on Jan. 31 after nine years at the helm. He serves as CEO of Hendrick Automotive Group, an automotive retailer and Ally customer. Effective February 1, he will be replaced on an interim basis by Douglas Timmerman, Ally’s president of dealer financial services. Timmerman will serve until the board finds a permanent replacement.

Ally Financial’s stock rose about 9% on Friday, likely due to improving earnings, sale news and a decent outlook for 2024. The lender’s net interest margin is expected to be in the range of 3.25% to 3.5%. This could be higher than the fiscal 2023 margin of 3.32%. Net amortization is also expected to increase from 1.36% in 2023 to 1.4% to 1.5% in 2024.

Ally relies heavily on the automotive market, with vehicle sales expected to be negligible and growth expected to slow in 2024. Ally is a solid company with a large niche market, and its stock is cheap, trading at 8 times earnings. But despite today’s challenges, this transition period is unlikely to see significant growth.