A month has gone by since the last earnings report for Ally Financial (ALLY). Shares have added about 7.3% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.
Ally Financial Q3 Earnings Beat, Revenues Rise Y/Y
Ally Financial’s third-quarter 2020 adjusted earnings of $1.25 per share handily surpassed the Zacks Consensus Estimate of 72 cents. Moreover, the bottom line improved 23.8% from the year-ago figure.
Results benefited from growth in revenues, partly offset by higher expenses. Moreover, a decline in provisions was a tailwind. Further, the balance sheet position remained strong during the quarter.
After considering non-recurring items, net income available to common shareholders (on a GAAP basis) was $476 million or $1.26 per share compared with $381 million or 97 cents per share recorded in the prior-year quarter.
Revenues Improve, Expenses Rise
Total net revenues were $1.68 billion, up 5.2% year over year. The figure also surpassed the Zacks Consensus Estimate of $1.50 billion.
Net financing revenues were up 1% from the prior-year figure to $1.20 billion. The rise was driven by higher gains on off-lease vehicles, higher retail auto revenues and lower funding costs, partially offset by higher mortgage premium amortization and lower commercial auto portfolio balance and yield.
Adjusted NIM was 2.67%, down 5 basis points (bps) year over year.
Total other revenues of $484 million improved 17.2% year over year.
Total non-interest expenses were up 8% year over year to $905 million. The upswing stemmed from a rise in all cost components.
Adjusted efficiency ratio at the end of the third quarter was 47.3%, up from 45.3% recorded in the comparable year-ago period. A rise in efficiency ratio indicates deterioration in profitability.
Credit Quality: Mixed Bag
Non-performing loans of $1.49 billion as of Sep 30, 2020, were up 60.7% from the corresponding period of 2019. However, NCO rate was 0.41%, down 42 bps year over year. Moreover, provision for loan losses declined 44.1% from the prior-year quarter to $147 million.
Balance Sheet Strong, Capital Ratios Improve
Total net finance receivables and loans amounted to $114.6 billion as of Sep 30, 2020, decreasing marginally from the second quarter. Deposits totaled $134.9 billion, up 3% sequentially.
As of Sep 30, 2020, total capital ratio was 14.1%, up from the prior-year quarter’s 12.8%. Tier I capital ratio was 12.1% as of Sep 30, 2020, up from the year-earlier quarter’s 11.2%.
The company expects used car values to rise by more than 5% year-over-year in 2020, thus aiding net interest income growth as well as benefiting NCOs. In 2021, used car values are expected to decline slightly.
The company expects funding costs to continue declining over the next several quarters. This along with retail auto portfolio expansion, higher average earning assets balance and strong lease gains will likely support NIM growth, with the same being 3% through 2021. Nevertheless, premium amortization and excess liquidity are expected to be headwinds.
Retail auto NCO rate in 2020 is expected to be less than 1.2%, down from prior guidance range of 1.8-2.1%.
Retail auto losses are anticipated to peak in 2021.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 44.25% due to these changes.
Currently, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Ally Financial has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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