Digital Banking And AI Will Transform Secular Financial Services

Key Takeaways

• Ally's digital banking strength and recent risk-reducing divestitures position it for accelerated asset growth, higher margins, and durable, low-cost deposit inflows driving profitability.
  
• Advanced technology adoption and strategic expansion across financial verticals signal potential for lower costs, diversified fee income, and market share gains over traditional competitors.
  
• Overexposure to auto lending, rising competition, credit and regulatory risks, and lack of diversification threaten Ally's future profitability and sustainable growth.

Catalysts

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

• While analysts broadly agree that the sale of Ally's credit card business removed risk and released capital, the market is underestimating how aggressively Ally can now accelerate asset growth and fund higher-yielding loans, with evidence of double-digit growth in core pre-tax income and high application volumes suggesting substantial upside to future net interest income and margins.
  
• The analyst consensus expects the company's securities repositioning and deposit optimization to drive moderate margin expansion, but Ally's proven ability to rapidly reprice deposits ahead of rate cycles and actively remix the lending book signals potential for structurally higher net interest margins, which could enable margins to rise toward the upper 3s or even approach 4 percent over the medium term, significantly lifting profitability.
  
• Ally's industry-leading digital banking platform is uniquely advantaged by both the shift of millennials and Gen Z to mobile finance and the strong, differentiated brand, supporting a multi-year runway for low-cost deposit growth, which enhances funding stability, reduces funding costs, and provides a foundation for durable revenue and earnings growth.
  
• Significant investments in AI and digital servicing have already yielded lower delinquency rates and improved loss rates in auto lending; as these technologies continue to scale, they can further reduce credit costs and operational expenses, driving sustained improvements in net margins and return on equity well above current expectations.
  
• The company's embedded expansion strategy across insurance, auto, and wealth management, combined with the ability to leverage partnerships through APIs and embedded finance, positions Ally to capture outsize share from legacy incumbents as consumer finance consolidates, fueling outsized growth in fee income and diversified revenue streams over the long term.

Ally Financial Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Ally Financial compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Ally Financial's revenue will grow by 16.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.7% today to 26.5% in 3 years time.
• The bullish analysts expect earnings to reach $2.9 billion (and earnings per share of $9.57) by about September 2028, up from $324.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 39.3x today. This future PE is lower than the current PE for the US Consumer Finance industry at 10.5x.
• 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 11.65%, as per the Simply Wall St company report.

Ally Financial Future Earnings Per Share Growth

Risks

• Ally is heavily reliant on auto lending for the majority of its earnings, making it vulnerable to disruptions caused by the acceleration of electric vehicle adoption, changing ownership patterns, and potential long-term declines in demand for traditional auto loans, which could reduce origination volumes and suppress revenue growth over time.
  
• Increased competition from fintechs, digital-native lenders, and direct-to-consumer auto manufacturer financing and subscription models is likely to erode Ally's market share, create pricing pressure, and compress net interest margins, ultimately threatening both top-line revenue and long-term profitability.
  
• The company's exposure to near-prime and subprime borrowers in its auto loan portfolio creates elevated credit risk, especially in the event of economic downturns or rising unemployment, which could drive up charge-offs and provision expenses while reducing net earnings.
  
• Persistent regulatory risk, including the potential for stricter consumer protection oversight, higher compliance costs, and limits on permissible fees across the financial sector, could further compress Ally's profit margins and result in lower net income.
  
• Difficulties in growing and cross-selling non-auto businesses such as insurance and corporate finance mean Ally remains insufficiently diversified, leaving earnings exposed to shocks within a single segment and hampering the company's ability to achieve sustained top-line growth.

Valuation

• The assumed bullish price target for Ally Financial is $56.49, which represents two standard deviations above the consensus price target of $46.47. This valuation is based on what can be assumed as the expectations of Ally Financial's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $39.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 11.7%.
• Given the current share price of $41.41, the bullish analyst price target of $56.49 is 26.7% 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.