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Investing.com -- BTIG downgraded Ally Financial (NYSE:ALLY) Inc to Sell from Neutral with a $30 target saying a challenging macroeconomic condition and increased competition in the auto lending space that could prevent the company from hitting its near-term net interest margin and return on equity targets.
BTIG highlighted multiple macro factors pressuring Ally’s asset yields in prime and superprime auto loans, including a heightened competition among the top 10 banks for prime and superprime loans, pushing net charge-offs lower.
While automakers are incentivizing auto sales through low-APR offers, which has eroded Ally’s pricing power.
Increased competition in auto floorplan financing, with OEMs and other banks driving market share with 0% or low-rate offers.
BTIG also flagged concerns over FICO score inflation that could disproportionately affect borrowers with scores between 680-720, along with lower recovery rates stemming from weaker used car prices and higher reconditioning costs.
BTIG expects a guide-down in Ally’s Q1 2025 earnings and is 32% below consensus for Q1 EPS, primarily due to interest income 3% below consensus and credit loss provisions 15% above expectations. The firm cut its 2025 and 2026 EPS estimates by 3% and 13%, respectively.
“We think heightened competition among banks for prime and superprime auto loans will drive lower asset yields and loan origination volumes for Ally than what is contemplated by consensus,” BTIG said.
Ally is targeting a mid-teens ROE and $6 EPS by 2027, which requires a NIM of 3.80%. But this is unlikely due to asset yield compression and insufficient auto loan originations to quickly shift from lower-yielding investment securities to higher-yielding auto loans.
BTIG cautioned that Ally’s ability to improve asset yields through a mix-shift-to-higher-yields strategy is limited.
“Selling investment securities may penalize Ally’s capital ratios, as we saw when Ally recently sold $2.8 billion of securities for a $250 million loss,” BTIG noted.
If Ally were to realize its $3.9 billion in cumulative net unrealized losses in AOCI, its CET1 capital ratio could fall from 9.8% to within 15 basis points of the 7.1% minimum.