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Ally Financial (ALLY) Stock Down 5% Despite Q2 Earnings Beat

Ally Financial’s ALLY second-quarter 2020 adjusted earnings of 61 cents per share handily surpassed the Zacks Consensus Estimate of 18 cents. However, the figure deteriorated from the year-ago reported figure of 97 cents per share.

Results reflect growth in deposit balance and higher revenues. However, substantial reserve build to counter coronavirus crisis, higher operating expenses and fall in loan balance are headwinds. The company’s shares declined 5% following the release most likely due to these concerns.

After considering non-recurring items, net income available to common shareholders (on a GAAP basis) was $241 million or 64 cents per share compared with the net income of $582 million or $1.46 per share recorded in the prior-year quarter.

Revenues Up, Expenses Rise

Total net revenues came in at $1.61 billion, up 4% year over year. The figure also surpassed the Zacks Consensus Estimate of $1.45 billion.

Net financing revenues were down 8.9% from the prior-year figure to $1.05 billion. This decline resulted from lower commercial auto balance and portfolio yield, losses on off-lease vehicles and higher mortgage premium amortizationand consolidated liquidity levels, partly offset by higher retail portfolio yield.

Adjusted net interest margin was 2.42%, down 25 basis points (bps).

Total other revenues of $555 million climbed 40.5%, year over year.

Total non-interest expenses flared up 11.8% year over year to $985 million. This upswing mainly stemmed from rise in all cost components.

Adjusted efficiency ratio at the end of the second quarter was 52.5%, up from 46.1% recorded in the comparable year-ago period. A rise in efficiency ratio indicates deterioration in profitability.

Credit Quality Declines

Non-performing loans of $1.53 billion as of Jun 30, 2020 were up 69.7% from the corresponding period of 2019. Further, net charge-off rate was 0.58%, up 2 bps.

Also, provision for loan losses surged 62.1% from the prior-year quarter to $287 million. This rise was mainly due to the reserves built to combat the pandemic-induced economic slowdown.

Lower Loan Balance, Strong Capital Ratios

Total net finance receivables and loans amounted to $122.4 billion as of Jun 30, 2020, decreasing 5.8% from the first quarter. Deposits totaled $131 billion, up 7.1% sequentially.

As of Jun 30, 2020, total capital ratio was 13.8%, improving from the prior-year quarter’s 12.7%. Tier I capital ratio was 11.9% as of Jun 30, 2020, marginally up from the year-earlier quarter’s 11.2%.

Share Repurchases

During the first quarter, the company had repurchased shares worth $104 million. However, in mid-March, it suspended the share-buyback plan through the second quarter on the coronavirus crisis.

Our Take

Steady growth in revenues and deposits, along with decent loan demand, will likely support Ally Financial’s profitability in the days to come. Nevertheless, persistently rising expenses and provisions (as witnessed during the reported quarter) might clip profitability. Also, lower interest rates remain a major concern.

Ally Financial Inc. Price, Consensus and EPS Surprise

Ally Financial Inc. Price, Consensus and EPS Surprise

Ally Financial Inc. price-consensus-eps-surprise-chart | Ally Financial Inc. Quote

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

Earnings Release Schedule of Other Finance Companies

Discover Financial Services DFS, Enova International ENVA and Mr. Cooper Group COOP are scheduled to announce second-quarter results on Jul 22, Jul 28 and Jul 30, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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