Is Ally Financial a buy?
Ally Financial (NYSE: ALLY) is a financial services business that focuses on providing loans for auto loans. The first half of 2020 has been particularly difficult for the company as the world learns to deal with the coronavirus pandemic. The dramatic slowdown in economic activity hurt auto sales, which impacted Ally’s financing early in the year.
But the company’s profits rebounded vigorously in the second half of 2020. And with an ongoing vaccine rollout and an expected upturn in economic activity, the company is expected to get a further boost in 2021. does that make Ally Financial a buy?
A bright spot in a difficult year
Ally Financial managed to grow revenues by 6% year-over-year to a record $ 6.7 billion, despite the economic backdrop. This growth was fueled by strong auto financing, which enabled the company to process 12.1 million consumer claims, resulting in a financing volume of $ 35.1 billion during the l ‘year.
As a result, its auto finance operations segment saw revenue growth in 2020, with revenues reaching $ 4.5 billion, up 2.2% from the previous year. However, revenue in this segment declined 20.6% to $ 1.2 billion during the year due to a 28.5% increase in provisions for credit losses as the company established reserves in response to the pandemic.
2021 gives Ally’s management cause for optimism. According to IHS Markit, in 2021, the global auto market will see its sales increase by 9%, to $ 83.4 million, and it is expected to increase by 5% in 2022. In the United States, new vehicle sales are expected to increase. ‘about 16 million, which is a 10% year-over-year increase.
As auto sales rebound, Ally is well positioned to see continued growth in this area. Its auto finance operations have been its largest segment and, over the years, Ally has established a relationship as a full service partner with over 18,700 auto dealers. As a result, this segment accounted for 67% of revenue, 91% of pre-tax profit and 58% of total company assets in 2020.
Expansion into other markets
While Ally has relied heavily on auto financing, it has also looked to other areas to drive growth. Over the past few years it has grown steadily in different verticals including insurance and mortgage finance.
The insurance segment is its second operating segment, representing 20.5% of its turnover. During the year, Ally generated $ 1.4 billion in insurance revenue, which translated into revenue of $ 284 million. Since 2018, Ally has grown its insurance segment at an annual rate of 15%, although growth slowed to 3.6% in 2020.
For the auto lender, offering insurance with auto financing is a no-brainer. Management is pleased with the resilience and countercyclical value of its insurance segment, noting record premiums and strong investment gains in 2020, and they expect stronger growth here in 2021.
In addition, the company took advantage of low mortgage rates and achieved record mortgage financing activity. During the year, this segment achieved sales of $ 220 million, generating net income of $ 53 million, representing growth of 14% and 32%, respectively.
Although its customer base grew 14% during the year, Ally believes that focusing on its existing customers is key to the company’s future growth. This is part of the reason why he added services in different verticals.
The company noted that deposits reached $ 137 billion during the year and that 50% of that growth came from existing customers. She is also proud of the fact that she has retained 96% of her clients among the best in the industry – one of the reasons she was named the best online bank by Money magazine in 2020 for the eighth time in 10 years.
Growth expected in 2021
Despite recording a $ 1.4 billion allowance for credit losses for pandemic-related difficulties, the company still posted a strong net interest margin 2.65% and efficiency report by 50.3% in 2020. Management has expressed optimism that it will achieve its net interest margins above 3% in 2021, which would lead to growth in net financing income in the mid-teens, after growing only 1.6% in 2020.
The company won’t release its $ 1.4 billion provision anytime soon, but instead will use it for net write-offs, which it expects to peak in the second half of 2021, while normalizing in 2022 and 2023.
With new and used auto sales growth of 10%, the company expects 2021 to be a good year as it continues to develop its dealer partnerships while investing in digital distribution channels. , thus guaranteeing customers easier access to its products.
The growth of the company will also be supported by its smaller segments, such as its insurance and mortgage businesses. Ally Financial is well managed and continues to excel in auto finance. The company also continues to serve customers in every way it can, improving its insurance, mortgage and loan services, all of which are expected to drive revenue growth, making Ally Financial a solid stock to buy and sell. hold.
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