Digital Banking And Auto Finance Will Define A Bright Future

Key Takeaways

• Digital-first strategy and disciplined cost management are driving customer growth, improved efficiency, and long-term margin expansion across core and diversified business lines.
  
• Strategic shifts into high-quality auto lending, insurance, and fee-based services are supporting stronger credit quality, revenue diversification, and resilient net interest margins.
  
• Continued dependence on traditional auto lending, intensifying competition, regulatory burdens, and limited diversification expose Ally to profitability risks and greater earnings volatility.

Catalysts

A digital financial-services company, provides various digital financial products and services in the United States, Canada, and Bermuda.

• The accelerating demand for digital banking and app-based financial services is enabling Ally's all-digital business model to acquire and retain customers more efficiently, supporting ongoing net customer growth and driving higher deposit stability; this should support long-term revenue and net margin expansion as the cost advantages of digital scale deepen.
  
• Rising application volumes and origination yields in Ally's core auto finance franchise-specifically with a high mix of prime borrowers-signal that investments in risk analytics and underwriting are both improving credit quality and enabling selective loan growth; over time, this is likely to reduce net charge-offs and stabilize or expand net interest margins and earnings.
  
• Ongoing balance sheet remixing into higher-yielding auto and corporate finance loans, as well as optimized deposit pricing, are increasing net interest margin beyond recent headwinds (e.g., card sale, mortgage runoff); this points to a path for above-peer NIM and sustained earnings improvement.
  
• Expansion into insurance and diversified lending adjacencies, supported by cross-selling to a deep dealer and consumer relationship network, is boosting high-margin fee-based revenues, with insurance written premiums and engagement setting up a growing ancillary revenue stream less sensitive to NIM compression.
  
• Ally continues to exercise disciplined cost management and digital operating leverage-as noninterest, controllable expenses have declined for seven consecutive quarters-while ongoing investment in AI-driven credit and digital servicing should drive further efficiency gains, bolstering net margins and long-term earnings growth.

Ally Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ally Financial's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $5.9) by about July 2028, up from $249.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.3 billion in earnings, and the most bearish expecting $1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 47.9x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 1.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.92%, as per the Simply Wall St company report.

Ally Financial Future Earnings Per Share Growth

Risks

• Heavy reliance on auto lending, especially as secular trends shift towards electric vehicles and direct-to-consumer auto sales models, may reduce traditional auto financing volumes, constraining revenue and long-term loan growth.
  
• Increased competition from both established banks returning to the auto lending space and innovative fintech platforms could compress origination yields, erode market share, and put downward pressure on net interest margins and earnings.
  
• Persistent regulatory pressures and compliance costs, including evolving consumer protection and data privacy requirements, could significantly increase noninterest expenses and limit the operating flexibility needed to sustain profit margins.
  
• The ongoing run-off of low-yielding mortgages and the divestiture of noncore businesses (e.g., credit cards, direct-to-consumer mortgages) may hinder efforts to diversify, making Ally more exposed to cyclicality in the auto and consumer credit markets, risking revenue stability and limiting long-term earnings growth.
  
• Elevated levels of consumer credit uncertainty, potential worsening unemployment, and muted deposit growth signal increased risk of higher loan losses and provisions in the future, especially if economic conditions deteriorate, directly threatening future net income and overall profitability.

Valuation

• The analysts have a consensus price target of $45.882 for Ally Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $59.0, and the most bearish reporting a price target of just $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.6 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $38.84, the analyst price target of $45.88 is 15.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.