Ally Financial (ALLY) Ratings Upgraded by Moody's, Outlook Stable
Ally Financial's (ALLY) ratings upgrade by Moody's reflects its robust liquidity, funding and capital positions as well as improving asset quality.
Ally Financial Inc.’s ALLY issuer as well as senior long-term unsecured ratings have been upgraded to Baa3 from Ba1 by Moody’s Investors Service — the rating services arm of Moody's Corporation MCO. The rating agency had placed the company’s ratings under review for upgrade in May.
The outlook of the company was unchanged at stable. This reflected the rating agency’s view that Ally Financial will be able to maintain its present solid “credit profile over the next 12-18 months.” Also, Moody’s is of the opinion that the company will be able to absorb any future credit losses arising from the coronavirus pandemic without hurting its earnings.
Reasons for Ratings Upgrade
Ally Financial, which primarily focuses on the auto finance sector, has been able improve its liquidity, funding and capital positions over the last several quarters, despite the COVID-19-induced economic ambiguity. While the company’s profitability deteriorated during the first half of 2020 due to higher credit losses (following the adoption of CECL accounting provisions and worsening economic backdrop), it has bounced back to the pre-pandemic level.
The rating agency noted that one of the primary reasons behind the ratings upgrade is Ally Financial’s robust liquidity position. The company has been able to consistently increase its core deposit base over the last several years. This has resulted in a funding profile that is almost similar to its regional bank peers. Per Moody’s, deposits were 89% of total funding as of Jun 30, 2021, a rise from 75% at 2019-end and 66% at 2018 end.
The company’s common equity Tier 1 ratio was 11.3% as of Jun 30, 2021, up from 10.6% on Dec 31, 2020 and 9.5% on Dec 31, 2019. Though capitalization will fall from this level given Ally Financial's share repurchase authorization, Moody's anticipates it to remain solid.
Further, Ally Financial’s asset quality remained strong, mainly driven by huge fiscal stimulus. The rating agency projects the company’s net charge-offs for auto loans to be relatively stable this year and then peak above the 2019 level in 2022.
When Can the Ratings be Upgraded/Downgraded?
The ratings could be upgraded, provided the company continues to reduce its reliance on auto finance and thereby develop a diversified revenue mix. Also, if Ally Financial demonstrates stable asset quality and profitability, and maintains improved funding and liquidity profiles, its ratings could be upgraded.
Ally Financial’s ratings could be downgraded if its capitalization weakens beyond Moody’s expectations. Also, “a strategic misstep amid its ongoing business execution,” a fall in core deposit funding or worsening credit quality will be negative for the company’s ratings.
The company's efforts to diversify the revenue base, gradual rise in demand for consumer loans and increase in deposit balances are expected to continue supporting its financials. Ally Bank’s (the digital bank and a division of Ally Financial) announcement of the elimination of overdraft fees on all accounts in June is likely to turn out to be a game changer and help garner market share. Earlier this year, several banks like Regions Financial RF, Fifth Third Bancorp and Huntington Bancshares HBAN have also taken steps to limit overdraft fees, while not totally eliminating the same.
While persistently rising expenses and near-zero interest rates remain major concerns for the company, Ally Financial is expected to be able to sustain efficient capital deployment activities, given a robust capital and liquidity position.
Shares of Ally Financial have surged 134% over the past year, outperforming the rally of 118.6% for the industry it belongs to.
Image Source: Zacks Investment Research
Currently, Ally Financial sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $2.4 trillion by 2028 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Recommendations from previous editions of this report have produced gains of +205%, +258% and +477%. The stocks in this report could perform even better.See these 7 breakthrough stocks now>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Regions Financial Corporation (RF): Free Stock Analysis Report
Moodys Corporation (MCO): Free Stock Analysis Report
Huntington Bancshares Incorporated (HBAN): Free Stock Analysis Report
Ally Financial Inc. (ALLY): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research