Ally Financial Stock In Correction Territory Ahead of Earnings – What Next

Ally Financial's stock price (NYSE: ALLY) finds itself in correction territory as it prepares to release its next earnings report this morning. The stock is currently down 12.51% in the last month, currently priced at around $38.45 leading in.

Analysts are projecting earnings per share (EPS) of $1.01 for the quarter, a 6.32% increase compared to the same quarter last year. However, these expectations are set against a backdrop of strategic business adjustments and credit challenges that Ally has been navigating throughout the year.

Revenue is expected to come in at $2.11billion, for a marginal 0.2% increase Y/Y.

Ally Financial's second quarter earnings, which saw the company surpass EPS expectations by 22.22% with an EPS of $0.99 and revenue exceeding forecasts by 2.94% at $2.1 billion, initially painted a positive picture. However, the stock declined by 4.18% following the report, highlighting the market's sensitivity to broader economic uncertainties and specific concerns about Ally's credit portfolio. Despite those concerns, Ally saw record auto loan originations hitting $11 billion, along with growth in digital banking customers to 3.4 million, marking 65 consecutive quarters of growth.

Several strategic initiatives have been implemented by Ally to fortify its financial standing. In March, the company sold $2.8 billion of low-yielding investment securities, incurring a pre-tax loss of approximately $250 million in Q1 2025. This move was aimed at reinvesting in shorter-duration securities at current market rates to boost interest income, aligning with a broader trend among U.S. banks to enhance profitability.

Additionally, the sale of its credit card business and the cessation of new mortgage loan applications in April represent a strategic pivot to concentrate on its core automotive finance and insurance operations.

However, Ally has faced intensifying credit challenges, particularly within its retail auto portfolio. Rising delinquencies and net charge-offs, attributed to high inflation and a weakening employment picture, have prompted a more cautious approach to auto lending.

This has included reducing loan approvals and focusing on borrowers with higher credit scores, as evidenced by the increase in the average FICO score of its auto borrowers to 710 during the third quarter of 2024.

While the consensus narrative highlights credit challenges and market uncertainties, the company's proactive measures to de-risk its portfolio and focus on core competencies could yield significant long-term benefits. Selling off non-core assets, while initially incurring losses, streamlines operations and allows for greater capital allocation to high-growth areas within automotive finance.

Furthermore, the cautious approach to lending, focusing on higher-credit borrowers, may insulate Ally from the worst impacts of an economic downturn, positioning it for stronger performance when the economic climate improves. This proactive risk management, combined with a commitment to digital innovation, could make Ally a more resilient and profitable entity in the long run.

Outlook and guidance once again will prove key.