Ally Financial Inc. (ALLY): A Bull Case Theory

Yahoo

10-05-2025

We came across a bullish thesis on Ally Financial Inc. (ALLY) on Substack by TSOH Investment Research. In this article, we will summarize the bulls' thesis on ALLY. Ally Financial Inc. (ALLY)'s share was trading at $32.51 as of May 7th. ALLY's trailing and forward P/E were 57.92 and 9.03 respectively according to Yahoo Finance.
An executive in a corporate boardroom discussing the future of financial services.
Ally Financial appears to be on the verge of a potential turnaround, driven by improving fundamentals in its core auto lending business, strategic realignment, and a shifting macro backdrop. While the company has underperformed in recent years—largely a result of missteps in underwriting and questionable capital allocation—management has taken steps to refocus the business on areas where it has competitive advantages. Notably, the decision to exit the credit card segment demonstrates a commitment to streamline operations and concentrate on its most defensible franchises: Dealer Financial Services, Corporate Finance, and Deposits. These adjustments come at a time when end-market dynamics, particularly in used auto financing, are becoming more favorable. In auto lending, Ally originated $10.2 billion in new loans in Q1 FY25 at an attractive 9.8% yield, supported by a record 3.8 million auto loan applications. This robust pipeline gives the company optionality to manage pricing and credit quality, evidenced by a healthy 44% share of originations coming from the prime (S-tier) segment, a substantial improvement from 2022 levels.
Simultaneously, Ally is navigating a unique challenge in its deposit franchise, which heavily depends on customers sensitive to interest rates. The company has strategically reduced its online savings account (OSA) APY from 3.8% to 3.6% in March 2025, despite no change in the fed funds rate, signaling a shift towards profitability over aggressive deposit gathering. This more measured pricing strategy has not yet impacted customer acquisition, with Ally Bank adding 60,000 customers in Q1 and total customer count growing 5% year-over-year to approximately 3.3 million. With over $38 billion in CDs maturing this year—representing more than 20% of Ally's total funding—the expected repricing at lower rates should help reduce funding costs by approximately 20 basis points, contributing to a projected 30 basis point improvement in net interest margins by FY26. This could add roughly $0.25 to annual EPS for every five basis point NIM expansion, providing a meaningful earnings tailwind.
Credit quality, a sore spot in recent years due to problematic underwriting in the 2022 vintage, is also showing signs of improvement. The 2022 cohort will account for only 10% of the auto book by year-end, and net charge-offs (NCOs) for retail auto loans declined year-over-year for the first time since late 2021. Still, Ally's progress on credit normalization trails that of peers like Capital One, whose early tightening in 2022 allowed for better performance. This lag serves as a reminder of management's past missteps, but also highlights the room for further improvement if Ally continues on its current path.
Looking at the competitive landscape, peer banks such as Capital One, J.P. Morgan, and Wells Fargo have reported double-digit growth in auto loan originations, which signals a recovery in demand. Ally's ability to remain competitive in this environment bodes well for its loan growth trajectory. However, macro risks such as rising tariffs could complicate the outlook. As Capital One's CEO noted, higher vehicle prices from continued trade tensions could have mixed effects: while they would improve borrower equity and recovery rates on existing loans, they could dampen demand for new auto loans, requiring thoughtful adjustments in strategy. This cyclical dynamic underscores the difficulty of managing a lending business through changing economic conditions, especially when past underwriting decisions carry lingering effects.
Overall, Ally's outlook is materially better than it was even a year ago. CEO Michael Rhodes has emphasized the importance of focus and resource allocation to areas where Ally has real scale and deep customer relationships. His commitment to prioritizing Dealer Financial Services, Corporate Finance, and Deposits aligns with the business's core strengths and sets the foundation for organic growth. With signs of stabilization in credit, disciplined deposit management, and operating improvements taking root, Ally is positioned to generate stronger results going forward. While not without risks, particularly in terms of competition and macro sensitivity, the stock appears attractively priced relative to its improved trajectory, presenting a compelling opportunity for long-term investors.
Ally Financial Inc. (ALLY) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 54 hedge fund portfolios held ALLY at the end of the fourth quarter which was 56 in the previous quarter. While we acknowledge the risk and potential of ALLY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALLY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.