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Ally Financial Ratings Affirmed by Moody's, Outlook Stable

Zacks Equity Research
·4-min read

Ally Financial Inc.’s ALLY issuer as well as senior long-term unsecured ratings has been affirmed at Ba1 by Moody’s Investors Service — the rating services arm of Moody's Corporation MCO. The outlook of the company remained stable.

Rationale Behind Ratings Affirmation

Ally Financial primarily focuses on the auto finance sector, which is amongst the industries that are hardest hit by the coronavirus outbreak and the subsequent halt in business activities. Moreover, as the virus-induced economic slowdown has already started to weaken the creditworthiness of borrowers, Ally Financial is expected to witness a deterioration of its asset quality and profitability.

Despite the concerns, the company’s ratings have been affirmed because Moody’s believes that Ally Financial will be able to maintain its asset risk, capital position and profitability compatible with its current ratings.

Notably, in first-quarter 2020, the company reported net loss (on a GAAP basis) of $319 million versus net income of $374 million recorded in the prior-year quarter. Results reflected substantial reserve build to combat the virus-related concerns, which, in turn, resulted in an increase in credit costs.

However, prior to this, the company had been witnessing improvement in profitability over the last several years.

In fact, supported by Ally Bank's growing franchise, Ally Financial has been able to continuously increase its deposit base. As of Mar 31, 2020, the company’s deposits comprised 75% of its funding profile.

Further, Ally Financial’s automotive finance operations displayed solid pre-tax income growth prior to the virus outbreak. At the end of 2019, the company witnessed growth in its used auto loan portfolio to 55% of total consumer auto loans.

Moreover, as part of the strategy to diversify into banking products, Ally Financial has forayed into the mortgage business, which is supporting its earnings growth. The company has also been making efforts to enhance digital offerings and introduce products to further boost its profitability.

Thus, despite the elevated risks that Ally Financial faces, owing to the current economic crisis that has resulted from the coronavirus outbreak, the above-mentioned positives served as the rationale behind the ratings affirmation as well as the stable outlook.

When can the Ratings be Upgraded?

If and when the risks related to the pandemic subside, the ratings could be upgraded, provided the company continues to reduce its reliance on confidence-sensitive wholesale funding and brokered deposits. Also, if Ally Financial demonstrates stable asset quality and achieves higher absolute capital levels, its ratings could be upgraded.

What Might Result in a Downgrade?

Ally Financial’s ratings could be downgraded if its capitalization weakens materially i.e. its tangible common equity to risk weighted assets falls and remains below 7.5%. Also, if the company’s asset performance is weaker than what Moody's currently expects or if liquid resources decline materially, its ratings could be downgraded.

Shares of Ally Financial have lost 52% so far this year compared with a decline of 42.9% of the industry.






Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, including Ally Financial, S&P Global Ratings recently revised the ratings outlook on 13 banks to negative from stable in response to the coronavirus-induced mayhem. A few of them are Capital One COF, East West Bancorp Inc. EWBC and Synovus Financial Corp.

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Moodys Corporation (MCO) : Free Stock Analysis Report
 
Capital One Financial Corporation (COF) : Free Stock Analysis Report
 
East West Bancorp Inc (EWBC) : Free Stock Analysis Report
 
Ally Financial Inc (ALLY) : Free Stock Analysis Report
 
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