Last year ended up being great for banks. The Dow Jones U.S. Banks Index gained 37%, trouncing the S&P 500's 25% gain. Many banks have performed well despite economic volatility, and the sector got a nice boost from the Federal Reserve's interest rate cut in September.
Ally Financial (ALLY 5.12%) didn't perform quite as well as many of its peers, gaining only 3% in 2024. Even worse, during the past six month the shares have fallen 13%. It's a mid-sized bank, but it has the status of being the top all-digital bank in the U.S. as well as the top prime auto lender. Those features make it stand out from other financial institutions, and they're reasons investors might want to take a second look. Let's see if Ally stock is a buy right now.
The largest all-digital bank in the U.S.
Ally was spun off from General Motors in 2010, and it came into being as an all-digital bank. That was still unusual 15 years ago, but it had a first-mover advantage in building its business, as well as a century of data and experience to guide it. Ally has become the largest all-digital bank in the country, an impressive feat considering the number of banks that are competing in that niche these days.
In the third quarter, Ally added 57,000 net new deposit customers for a total of 3.3 million, and it has an industry-leading 95% retention rate. Retail deposits increased by $1.3 billion last year for a total of $141.4 billion.
Millennial and Gen Z customers accounted for 74% of new members, and it's this younger generation of users that are drawn to Ally's all-digital platform. As they stay, engage, and grow with the platform, Ally has incredible long-term opportunities in expanding its business and competing with the bigger players in banking.
A robust auto-lending business
Ally retained its auto-lending business when it was spun off, and that's still its core business. It had 3.6 million applications in the third quarter and originated $9.5 billion in auto loans. Loan applications keep rising despite high interest rates, and it's expecting about 14 million for the full year, up from 13.8 million last year.
It's become more conservative in the auto loan division since defaults have been higher than expected. Its weighted average FICO credit score for these loans was 710, up from 704 last year, and close to the average of what's considered a good score. The approval rate went down from 30% to 28%, and 43% of loans went to customers in the highest credit tier.
Cheap stock, growing dividend
Ally is under some pressure, but it still reported rising earnings per share and return on tangible common equity in the third quarter. The market isn't seeing it that way, though. It's likely more nervous about smaller banks in light of recent bank failures. Is that what to worry about? Management has changed course to address a rising default rate and put more stringent lending standards in place, and it's demonstrating strength and stability. Ally is in the Berkshire Hathaway portfolio, and Warren Buffett isn't known for embracing risky stocks.
Since tumbling in the second half of 2024, the stock is quite cheap, trading at a price-to-book ratio of about 0.9 and a forward one-year P/E ratio of 6. At that low price, the dividend yields a high 3.4%, more than most bank stocks.
The last time this happened, Ally rebounded in a big way and surpassed almost all the big banks. I can imagine that happening again. More importantly, it has long-term tailwinds in its digital platform and robust auto loan business, and it could present value for investors looking for a great bank stock.
