Is Ally Bank in Financial Trouble With Business Challenges

Ally Bank has been facing some business challenges that have raised concerns about its financial stability. The bank's revenue growth has slowed down in recent years, with a decline in interest income due to low interest rates.

In 2020, Ally Bank's net interest income decreased by 12% compared to the previous year, which had a significant impact on its overall revenue. This decline in revenue has put pressure on the bank's profitability.

Ally Bank has been trying to offset this decline by increasing its non-interest income through fees and other services. However, this strategy has not been enough to offset the decline in interest income.

The bank's efforts to expand its services and products have also been hindered by increased competition from other online banks.

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Ally Bank has experienced wide fluctuations in its business due to supply chain shortages and changing interest rates.

Its business leans heavily on automotive sales, which is another highly cyclical industry that fluctuates with the economy.

Ally's business boomed during the pandemic when automakers dealt with significant supply chain disruptions and consumers utilized automotive loans to finance their purchases.

However, supply chain issues began easing as the price of used cars fell in early 2022, and with rising interest rates, Ally saw a sizable drop in its earnings.

Ally's automotive financing originations fell 14% last year, and rising deposit costs put pressure on its net interest income, leading to a 40% year-over-year drop in total net income.

Ally's business is highly cyclical, meaning it tends to do well during economic expansions but underperforms during contractions.

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Ally's business has experienced wide fluctuations amid supply chain shortages and changing interest rates. Consumer banks like Ally Financial are highly cyclical stocks, which means their business and stock prices tend to follow the business cycle.

Ally's business leans heavily on automotive sales, another highly cyclical industry that fluctuates with the economy. Automotive sales boomed during the pandemic due to supply chain disruptions and rising prices of new and used vehicles.

However, supply chain issues began easing in early 2022, and the Federal Reserve aggressively raised its benchmark interest rate. Rising interest rates put a damper on loan demand, and with automotive prices stabilizing, Ally saw a sizable drop in its earnings.

Ally's automotive financing originations fell 14% last year, and rising deposit costs put pressure on Ally's net interest income. As a result, Ally's total net income fell 40% year over year.

The rising interest rate environment has also led to an increase in automotive debt delinquencies. Consumer automotive debt is around $1.6 trillion, and accounts in serious delinquency (90 days or more delinquent) have increased from 2.22% to 2.66% over the past year.

Ally Financial saw 4.42% of retail auto loans that were 30 days or more delinquent and 1.23% more than 60 days delinquent in the fourth quarter. Ally has $3.1 billion in reserves for potential future losses on its retail automotive loan portfolio, providing a coverage ratio of 3.65%.

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Ally Bank's structure is a key factor in its stability and success. Ally Bank is a direct bank, which means it doesn't have a traditional branch network.

As a direct bank, Ally Bank operates primarily online and through mobile banking, reducing its overhead costs. This model allows Ally Bank to offer competitive rates and fees to its customers.

Ally Bank is a subsidiary of Ally Financial, a holding company that was formerly known as GMAC Inc. Ally Financial was spun off from General Motors in 2006.

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Ally Financial is an advertising partner of The Ascent, a Motley Fool company.

The stock has recovered nicely, gaining 77% since its March 2023 low.

Ally Financial trades at a discount to tangible book value, which is still up 62%.

Investors must keep a close eye on its credit quality as the bank stands to benefit from a pivot in the Federal Reserve's interest rate policy.

Ally Bank is facing intensified credit challenges, particularly in its retail automotive loans segment. This is causing concerns for investors, with shares of the lender dropping by nearly 18% after the company's CFO highlighted the issues.

The retail auto sector has seen a significant increase in delinquencies, rising by 20 basis points in July and August. This is a red flag for Ally Bank, as it suggests that borrowers are struggling to make payments.

Net charge-offs, which represent debts that are unlikely to be recovered, have also increased. Ally Bank's retail auto net charge-offs rose to 2.1% in July, from its previous guide of 2.0% in April.

The company has adjusted its outlook on retail loan credit several times over the past year, highlighting the difficulty in forecasting credit. Ally Bank's management team has taken steps to boost profitability, including the sale of its Ally Lending business to Synchrony Financial in March.

The economic factors contributing to Ally Bank's credit challenges are clear. High inflation and cost of living, combined with a weakening employment picture, are making it harder for borrowers to make payments.

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