Ally Bank – Poised To Benefit From Rate Hikes And Consumer Trends

JimVallee/iStock via Getty Images Ally Financial ( ALLY ) is poised to benefit from rate hikes and is priced at a reasonable valuation. Interest rates are likely to rise over the coming years, hurting stock valuations and some businesses. Ally offers a way to stay invested in a business model that benefits from a rising interest rate environment. How consumer banks stand to benefit from rising interest rates

Banks tend to benefit from higher interest rates. Intuitively, this makes sense since banks’ core profits come from lending money and collecting interest payments. However, not all banks are created equal; having a large deposit base provides banks with a cheap and stable source of capital to loan out. If a bank doesn’t have enough deposits to lend out, they instead need to borrow. The interest on this borrowing is higher than the interest paid on deposits.

This appears to be doubly true for the coming rate increases given that banks are flush with deposits right now . Banks don’t need to attract more deposits, so they will be able to keep interest rates paid low. That increases the net interest margin that banks earn on the difference between the interest they pay on deposits and what they can charge on loans. Finding the right bank

When looking at banks I use two key ratios: price to tangible book and return on equity. Price to tangible book is a general guide post for the intrinsic value of a bank stock since banks constantly update the value of their assets to market price. Return on equity helps show how profitable a bank’s business model is.

Chase ( JPM ) is the golden standard, as far as I’m concerned, when it comes to consumer banking in the U.S. It has a huge deposit base – the largest in the U.S . It also earns a very nice return on equity. However, it trades at a high valuation right now in terms of price to tangible book.

The rest of the big four in the U.S. – Citigroup ( C ), Wells Fargo ( WFC ) and Bank of America (NYSE: BAC ) – all have lower returns on equity. BAC trades at a high valuation of price to tangible book. Two banks that I’ve been watching are Capitol One Financial (NYSE: COF ) and ALLY. Both trade at more reasonable valuations, have proven profitable business models, and fund most of their lending via deposits. Data by YCharts Online-first banking

As with the rest of our lives, banking is increasingly moving online . The pandemic only accelerated this trend. Most consumers no longer have a reason to go into physical branch locations or visit ATMs. ALLY and COF are both large, online-only banks – allowing them to capitalize on this trend. Defensive but rewarding loan portfolio

ALLY and COF are the two largest auto loan banks in the U.S . Their overall portfolios are similar in size. ALLY is more concentrated in auto lending, while COF is more focused on credit cards with auto lending coming in second. Both offer their own auto loan origination systems that aim to make it easy for dealers to originate loans with them.

Auto loans are defensive in that they are collateralized by a critical need for borrowers. Cars are a requirement to work and live for most Americans. During the Great Recession, the overall delinquency rate peaked at about 4.5% for auto loans. For reference, credit card delinquency peaked at ~6.5% and mortgage delinquency at ~11.5%. Despite the defensive nature of these loans, ALLY’s overall auto loan portfolio is still yielding, on average, 6.8% in Q4 . Auto loan delinquency rate (Federal Reserve Bank of New York Consumer Credit Panel/Equifax) Room to grow

Both ALLY and COF are an order of magnitude smaller than the big four. Both have been able to grow their tangible book value per share at over a 9% CAGR over the past five years. Data by YCharts ALLY’s consumer bank has only recently started expanding its offerings beyond a basic savings/checking account. They’ve brought onboard an investing platform, mortgage originations, and credit cards. They’ve shown the ability to cross-sell their customers on using multiple banking products. Ally Investor relations Slowing tailwinds

High car prices and latent demand from 2020 created a surge in auto loans in 2021. Experts are predicting that this trend will reverse soon. The company said they projected loan origination to begin declining in 2022 and return to more normal levels by the […]

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