A month has gone by since the last earnings report for Ally Financial (ALLY). Shares have added about 1% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Ally Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Ally Financial Beats Q3 Earnings on Higher Revenues
Ally Financial’s third-quarter 2019 adjusted earnings of $1.01 per share surpassed the Zacks Consensus Estimate of 98 cents. The bottom line comes in 11% higher than the year-ago quarter’s reported figure.
Results were driven by improvement in revenues and growth in deposit balances. Also, capital ratios were impressive. However, higher non-interest expenses, along with rise in provision for loan losses, acted as major headwinds.
After taking into consideration non-recurring items, net income available to common shareholders (GAAP basis) was $381 million, increasing 2% from the prior-year quarter.
Revenues Improve, Expenses Rise
Total net revenues came in at $1.60 billion, up 6% year over year. Further, the figure surpassed the Zacks Consensus Estimate of $1.56 billion.
Total non-interest expenses flared up 4% year over year to $838 million. The upside stemmed from an increase in all components of expenses except insurance losses and loss adjustment expenses.
Credit Quality: Mixed Bag
Non-performing loans of $929 million as of Sep 30, 2019 were down 3% from the prior-year quarter end.
However, provision for loan losses increased 13% year over year to $263 million. The rise was mainly due to higher net charge-offs and asset growth.
Strong Balance Sheet, Capital Ratios Improve
Total net finance receivables and loans amounted to $127.33 billion as of Sep 30, 2019, decreasing marginally from the previous quarter. Deposits totaled $119.23 billion, increasing 2.5% sequentially.
As of Sep 30, 2019, total capital ratio was 12.8%, improving 12.7% from the prior-year quarter end. Tier I capital ratio was 11.2% as of Sep 30, 2019, up from 11.1% as of Sep 30, 2018.
During the reported quarter, the company repurchased shares worth $300 million.
For 2019, NIM is likely to be relatively stable. Further, in 2020 NIM is likely to expand, due to changes in balance sheet dynamics.
Despite volatile rate environment and some quarter-over-quarter fluctuations, net interest income (NII) is likely to grow over the next several quarters.
Due to seasonality, expenses related to technology and marketing will flare up in the fourth quarter. This, along with the closure of Health Credit Services’ buyout, will escalate its operating expenses by $25-$30 million.
Also, efficiency ratio for 2019 is anticipated to be unchanged or down 1% year over year.
Net charge-off ratios for 2019 will likely outperform the 1.4-1.6% range, which was provided by the company earlier.
Moreover, CECL’s impact is anticipated to be around 25% in 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -5.23% due to these changes.
At this time, Ally Financial has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Ally Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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