Ally: Well Positioned As Digital Banking Is Becoming Popular

A secular trend in digital banking is underway and Ally Financial (NYSE:ALLY) is well-positioned to prosper as evident by its proven domain expertise. The company’s future in the digital banking space looks promising given its development and fostering of an integrated digital suite of banking products across deposits and lending. This strategy portends well for long-term investors buying now while the stock is trading at relatively low valuations.

Digital Consumer Financing Is Becoming More Popular

From ride-hailing to social media, digital solutions and the propagation of technology are continuing to become more ubiquitous in the daily lives of consumers all around the world. This trend is true in the world of consumer finance as well, especially with millennials. According to Bankrate.com, “Digital banking is becoming more popular with consumers. An estimated 203 million people use digital banking services in 2022, and that number is projected to reach 216.8 million by 2025. The age group most likely to use a digital-only bank is 35 to 44 year olds, with 29 percent of those in this age range having digital-only accounts as their primary accounts.” This “digital-only” account is an important distinction as it refers to what is called direct banking – a fully electronic enabled bank that does not have any traditional brick and mortar branches. Ally is considered a direct bank, and a good one at that. Bankrate picked Ally bank as the best online bank of 2022 for having the top Annual Percentage Yields (APY) savings rates, a highly rated app, and no monthly fees.

Ally appears to have a long-term competitive advantage that is anchored on the core assumption of the continued proliferation of digital banking. In contrast to past generations, present consumers are becoming more and more comfortable and trusting of digital banking platforms. McKinsey Research shows that “Approximately 40 percent of consumers leverage a fintech platform for daily financial activities, and more than 90 percent of those who do so are satisfied with their experiences.” Historically, consumer banking relationships were established with regional bankers interacting in person with customers at local banks. Therefore, bank business strategies were focused on personal relationship development and engaging in-person sales teams. A transformation is underway where consumer bank companies should focus on technology-enabled digital offerings, not just for the sake of differentiation, but as an endeavor necessary to survive. The Mckinsey report expounds: “Incumbent banks will not be able to sustain their traditional businesses. They have a choice to either remain a commoditized business that strictly manages a balance sheet or evolve into a tech-enabled business that can compete in a new era of customer-centric financial experiences.” Ally appears to be ahead of the curve on this point and in a strong position to prosper and potentially gain market share in the future. This approach is emphasized as a strategic priority in Ally’s 2021 annual report: “to grow and diversify our leading auto, insurance, and digital-bank platforms through increased scale and expanded product solutions.” Furthermore, this digital-bank strategy appears to be supporting growth and resonating with younger generations. As of quarter three 2022, Ally has experienced 54 consecutive quarters of customer growth. During the quarter, 69% of their new customers were from millennials or younger generations, thus offering longer-term opportunities for retention and growth.

Well Positioned with Integrated Suite of Digital Products

Ally can capitalize on its favorable long-term upside potential if the company can continue to grow its ancillary products and offerings beyond its core auto lending and direct banking capabilities. Ally has an integrated suite of digital offerings that include newer products such as mortgages, digital wealth management and online brokerage, and credit cards. The benefits of an integrated multi-product approach include cross-selling products as well as the ability to acquire customers from multiple fronts. In particular, Ally has the opportunity to grow interest in new products from its core direct banking customers as well as acquire new Ally customers from non-direct traditional banks. “Inflows from traditional banks represent the majority of growth, and supports our core assumption that direct banks will become increasingly attractive as the gap between traditional and direct banks widens.” says interim CFO Brad Brown. “Deposits continue to serve as the primary gateway to our other banking products, which enhance brand loyalty, drive engagement, and deepen customer relationships.” It should be noted, however, that this all-in-one integrated digital consumer finance approach is not unique to Ally and one risk for investors to contemplate is competition amongst rising fintechs and digital banking peers. Sofi Technologies Inc. and Discover Financial Services, in particular, are two notable competitors that also offer a suite of consumer finance products backed with digital solutions and technology. Stock prices have declined extraordinarily over the past year for all three companies, leading to the natural questions of why have prices declined? And, is now a good time to buy?

Low Relative Valuation and Start of a Strong Dividend Program

At present prices, ALLY offers a favorable entry point for long-term investors given its low valuation. Additionally, ALLY offers a strong and growing dividend program.

As shown in the figure above, ALLY is trading at relatively low valuations on a trailing twelve-month (TTM) price-to-earnings ratio basis. The current TTM P/E ratio is below one standard deviation of its six-year average. When viewing through the Price to Tangible Book Value (PTBV) lens, on an absolute basis, valuation looks favorable at 0.8. However, according to historical PTBV levels for ALLY shown in the figure above, this is not too far from the six-year average of 0.88. Lastly, ALLY’s dividend program has been strong in recent years with an impressive 24.57% 5Yr dividend growth rate. Importantly, this dividend growth has occurred without compromise to the payout ratio as seen in the figure above. During the last six years of dividend increases, a relatively low payout ratio of approximately 20% persisted, which is a good early sign of a well-managed dividend program.

Why has the stock price dropped over the last year, and should investors be concerned? Forecasts for a recession, especially with respect to credit losses and consumer cash flow constraints, portend poorly for financials. More notable for Ally, however, is the unfavorable recent trend in increases in retail auto net charge-offs and delinquencies. ALLY has high exposure to auto lending, and therefore any near-term blunders in auto lending, such as a dramatic reduction in used car prices, for example, continued increases in net charge-offs, or increases in delinquencies are risks for investors to monitor.

Perhaps these short-term headwinds continue to add uncertainty and risk for Ally, however for long-term investors this might be a good time to purchase a company with a solid record of digital banking expertise, trading at a favorable valuation, with options for long-term growth as the world of consumer finance becomes more and more digital.