ALLY - Ally Financial

[muscleman]

Hey guys,

 

Love this name, one of my top holdings. Not only is it "benefiting" from the cheap valuations of all financials but I think this one is posed to growth for the long run given their ability to grow their deposit base at double digits and they've had a great response from millennial given their "online bank" branding. Their main competitive advantage in my opinion for now is their ability to pay a high interest rate on their deposit base by passing on the savings from not having branches to customers, their also aiming to achieve a mid-40% efficiency ratio which would be spectacular for the industry. I think ROE should keep growing and stabilize at around 12%+ and they've done a great job of not only cleaning up the balance sheet (e.g. paying down high cost legacy preferreds), but completely reinventing the brand.

 

As of the TradeKing acquisition, I wouldn't be to worried about the price, as long as their able to move some of their existing customers into the platform (which may prove difficult but I imagine they've looked into this), I'd love to look a bit more into their cross-selling strategy because if executed effectively, this could be booming for longer term earnings growth (i.e. customers with auto loans opening deposit accounts, or deposit account holders opening a brokerage accounts etc.) They've also started offering mortgage products as well as a branded credit card, it seems their on track to become a universal bank.

 

Finally, not only is the valuation insanely cheap ~8x forward PE ratio and TBV per share of 0.7, but management has acknowledged specifically the discount there is in their share price and thus decided to allocate most of their capital returns to buybacks which should prove very accretive to shareholders who standby, I think they're buying back ~10% of market cap which is a very significant figure.

 

I'm a long term shareholder here.

 

What's your take on the auto loan industry? I am comparing ALLY with SC. SC's super cheap based on PE, but I am not 100% confident about its loan practice. ALLY has less subprime, a stronger deposit base, but a higher P/E.

 

 

[chesko182]

 

What's your take on the auto loan industry? I am comparing ALLY with SC. SC's super cheap based on PE, but I am not 100% confident about its loan practice. ALLY has less subprime, a stronger deposit base, but a higher P/E.

 

 

Hey muscleman,

 

SC certainly seems a bit cheaper from a PE ratio standpoint but I agree that its loan practice is questionable and also you don't have a lot of history of their business model and financial results over a full cycle given that they just acquired Sovereign Bank and changed the name, also not sure how the acquisition and management/strategic changes have turned out.

 

From P/B standpoint Ally and SC seem to be trading at similar levels, but from a risk standpoint SC certainly has a lot more exposure to subprime auto loans while ally's I believe is around 14%. They have a long history (from the GMAC days) of sensible underwriting and extensive experience in the used car market. I'd be more comfortable with ally in this case, but I haven't taken a deep dive at SC. Ally's earning in my opinion have more upside from the growth in deposits, transition to universal bank, lower cost of funding and achieving operational targets such as efficiency ratios of mid 40s and ROE of 12%+ which they seem to be in track for. As they keep improving the market should recognize it and eventually it should trade above book value and a more adequate PE ratio.

 

Also, check out this weekend's Barron's article on Capital One which is another competitor in the subprime space.

[Guest notorious546]

How do you guys think about the relationship the company has with OEM's outside of GM/Chrysler? I'm trying to come up with an opinion but can't seem to really hold any weight that it is a good or bad.

[chesko182]

Ally published their 2018 Outlook presentation which I think is phenomenal and goes through every major strategic initiative they are taking, their capital allocation plans, the state of the auto lending market and their deposit/online banking franchise.

 

I recommend anyone who is interested or invested to look at it closely (and possibly read the transcript).

 

I am working on a piece on where I think this company could be in the next 10 years which I hope to publish soon either in VIC (if I get accepted) or SeekingAlpha.

 

It's my largest holding.

ALLY_-_Financial_Outlook_Call_2018.pdf

[JRM]

I've read that they are one of the worst offenders in the subprime automotive lending area.  They are proud to report percentages of originations by credit tier,  but its more difficult to find what percentage of their auto portfolio is near prime and subprime.  Anybody know?

[chesko182]

I believe around 14% of their retail auto loan book is subprime (less than 640 FICO), average FICO score around 690. They have explicitly stated that they are finding attractive risk adjusted returns in lower credit tiers where a lot of banks have stepped out, but they are not focusing on the deep subprime area (below 550) which is the scary stuff Santander and the like usually does. The 10-K has the breakdown of the originations by FICO score for the last 3 years, which is very representative of their overall portfolio given this is a pretty low duration asset class, and before that they were actually focusing on higher tier loans.

 

Attaching a good presentation they did last year on their auto lending underwriting and risk management.

 

Where did you read they were some of the worst offenders? Very curious to see that. Maybe you're confusing them with legacy GMAC, which had ResCap under it (mortgage lender) and obviously blew up in the FC. Auto loans actually did ok during this time. Ally has been around for 100 years and their core business has done ok.

Ally_Financial_-_Auto_Lending_and_Risk_Management_-_2016.pdf

[JRM]

I thought I remember reading a Bloomberg article or something similar to this article: https://www.thestreet.com/story/14127840/1/ally-santander-face-reckoning-after-auto-lending-boom-s-amp-p-says.html

 

I remember S&P saying last year Ally and Santander were among the worst offender.  They were basically taking the loans that others didn't want.

[Spekulatius]

I owned this a while ago, but then sold out. I really like what they do on the funding side (online only bank, business model sort of like Geico in insurance), but the way they put the money to work shivers my timbers.

For car loans, the credit unions absolutely have ruined the market. I could get 1.75% 5 year car loans a while ago and that is 2.5% now. I have no idea how Ally gets 6% overall on their portfolio. I personally think they even near prime (<660 score) is pretty scary and that is where ALLY seems to meddle. The credit union loans are easy to get at the car dealership, even if you are not mameber yet, if you just ask. I don’t know about commercial floor plan loans to dealers where ALLY is pretty strong.

 

I wish they would diversify more away from car loans, as I think this business is more risky than the current numbers suggest.

[JRM]

I try not to read too much into the FICO numbers these days.  I don't think they tell the whole story of credit risk.  They don't tell you the source of income and the sensitivity of that income to the economic cycle.  Its been over 7 years since the last downturn; with record low unemployment I'm sure everyone has pristine credit today.

[chesko182]

Well, if history is any guide take a look at their S-1 they filed before the IPO which has information on the performance of their auto loans at the height of the financial crisis (2008-2010). Their mortgage exposure obviously blew up, but the auto loan book performed ok in my opinion, with loss-rates not exceeding 2%. I believe their auto loan loss provision % in 2008 was 1.7% of their total automotive assets, with a higher credit quality loan book back then (the auto book lost some money that year, but profitable in 2009 and 10). Right now they are provisioning between 1.4-1.6% given they have been increasing their subprime exposure, but this doesn't seem concerning to me as they are finding the right balance of risk and returns in that part of the market. I think that even if you stress their book with some draconian scenarios of falling used car values and delinquencies/charge-offs they will probably loose some money, but should be able to absorb that with their current cap ratios and on the long run be fine.

[chesko182]

Wanted to share the article I recently published in SeekingAlpha which shows my thinking behind the investment in Ally and trying to think really long term (which I find not a lot people do in this business, but many do in this forum). I know it's a rosy scenario, but I think it is within the probability of outcomes and certainly something you are not paying for at these dirt cheap multiples. Point is even if it doesn't play out to those assumptions, you are likely to achieve a satisfactory outcome with this investment, assuming management doesn't do anything stupid (borrowing from WEB, which is central to any long-term investment in a bank).

 

Would love any feedback or comments.

 

https://seekingalpha.com/article/4160335-ally-financial-look-like-10-years

[Spekulatius]

Somehow these numbers don’t add up. If ALLY has a 12% ROE, they can really grow faster than 12%, without increasing their leverage, much less purchasing  4% of their shares every year.

[vinod1]

Wanted to share the article I recently published in SeekingAlpha which shows my thinking behind the investment in Ally and trying to think really long term (which I find not a lot people do in this business, but many do in this forum). I know it's a rosy scenario, but I think it is within the probability of outcomes and certainly something you are not paying for at these dirt cheap multiples. Point is even if it doesn't play out to those assumptions, you are likely to achieve a satisfactory outcome with this investment, assuming management doesn't do anything stupid (borrowing from WEB, which is central to any long-term investment in a bank).

 

Would love any feedback or comments.

 

https://seekingalpha.com/article/4160335-ally-financial-look-like-10-years

 

Qualitatively you need to address why you think Ally would end up dominating the auto loan market with captive finance units of the automakers and big banks losing market share. You are implicitly assuming this would be the case.

 

Quantitatively as Spekulatius pointed out the numbers are not consistent. You need to build out the three financial statements over the 10 years and to then ensure they are consistent. This would help point out the gaps.

 

Vinod

 

[Broeb22]

Somehow these numbers don’t add up. If ALLY has a 12% ROE, they can really grow faster than 12%, without increasing their leverage, much less purchasing  4% of their shares every year.

 

+1

 

They are currently replacing unsecured debt with retail deposits. They won't be able to grow the business anywhere close to 15-20% per year unless they can find profitable loans to underwrite, and if they do, they will have to stop buying back stock. They can't buy back stock and grow loans as fast as you're claiming.

 

As an owner of ALLY, they have some company-specific levers to pull to reduce cost of funds that is underappreciated, as well as some operating leverage in their business since their cost to attract to deposits (i.e. technology costs) is more scalable than a bricks and mortar-based bank.

 

However, the world in general is going this direction (see Goldman bank, Synchrony, others with online-only banks), so their advantage over time will probably diminish.

[abitofvalue]

does the company itself expect to grow its loan book that quickly? My understanding is that growth from here is going to come from other products (securities, mortgages, eventually cards). New auto loans are going to basically replace run-off + maybe little growth.  Overall near-term this is a financial engineering story - replace unsecured debt with cheap deposits.

 

LT the real question is can Ally transition from being just an auto lender to being viewed as a bank. Few companies have been able to change their perception so i think it may be a long slog... if successful they get re-rated to more bank like multiples.

[HJ]

This thing has been trashed together with all the other consumer finance focused companies, SC, COF, DFS, SYF, ADS, etc.  Consumer credit seems to be holding in quite well for now.  Trading at something like 7x 2019 earning, significantly below book value (lower P/B than SC!), with ROE looking to do low teens going forward.  Relative to the big banks, they don't have any EM / European related risks, and people seem to think that domestically this go around, corporate credit is the one that is more problematic.  Pure US consumer focused business, there's some uncertainty regarding CECL, but certainly feels cheap at the moment. 

[chesko182]

Pretty solid results today and company keeps executing

 

EPS grew 17% YoY, highest since becoming public.

 

retail deposits up 21%, customer accounts up 23%. Mortgage originations and Ally invest is growing very nicely too

 

ROTCE of 12.4%, mgmt target is 13-14%

 

bought back 1bn worth of stock last year (8% of mkt cap), new buyback plan will buy almost 10% of curr mkt cap. has cumulatively bought 19% of shares outstanding since mid-2016 **all below book valued**

 

and after all this solid performance it still trades at just around tangible book value...

 

https://media.ally.com/

https://s2.q4cdn.com/753234398/files/doc_financials/2019/q2/2Q19-ALLY-Earnings-Presentation.pdf

[chesko182]

down 10%+ today on a newly announced major acquisition which creates a new revenue platform pretty complementary to the core online banking business (credit card +unsecured lending). Ally had tried to get into this and prob realized it's easier to buy than to build.

 

market doesn't seem to like it. don't love the big share issuance but guessing the owner wanted this and at least aligns his incentives as he's gonna become one of the biggest shareholders now, stay as an executive and join the board. Also buyback still in place and 50% of to be paid in cash.

 

Multiple seems decent at 10X/6-7X income, adj for excess capital. synergies of 50mm sound real (lower costs, better funding, new revenue streams - not incl.). accretive to EPS and ROTCE, adds 3mm customers..

 

Underwriting seems decent as they broke-even in the crisis and assets have grown nicely historically.

 

Feel free to share thoughts

 

Press release: https://www.prnewswire.com/news-releases/ally-financial-announces-agreement-to-acquire-cardworks-301007099.html

Presentation: https://s2.q4cdn.com/753234398/files/doc_presentations/2019/02/Ally-Financial-Announces-Agreement-to-Acquire-CardWorks-2020.pdf

 

[Casey]

> don't love the big share issuance

 

Yep. Very much don't love it. Whole reason I own this is so they reduce shares. Perhaps I am lacking in vision. At least the share price is lower now ???