Ally Financial - What Could It Look Like In 10 Years?

About: Ally Financial Inc. (ALLY)
by: Poor Aksarben

Ally is an attractive long-term compounder given its high growth of deposits.

Cheap on a relative and absolute basis.

Management is taking the right steps in strategy and capital allocation.

"If you are not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes." - Warren Buffett.

In the following keep-it-simple analysis, I will try to analyze where Ally Financial (NYSE:ALLY) could be in 10 years, what sort of returns an investor can expect, and how undervalued it would be now if even part of this scenario is plausible.

Ally Financial is a bank holding company that has two core competencies: auto lending (commercial and retail) and online banking. The company is focusing on growing their online banking platform capabilities and expanding their product offering to become a more diversified bank in the long term.

Why is it attractive?

  • Cheap on an absolute and relative basis: 0.9x P/B, 9x 2018 P/E, 8x 2019 P/E.
  • Management is proficient in capital allocation, strategic initiatives and thinking about the long term.
    • Not chasing volume for growth purposes, but focusing on risk-adjusted returns and high ROE underwriting as well as buying back stock at attractive levels.
    • Making investments in marketing and technology to build the brand and platform.
    • Expanding fee-generating products (wealth management, advising) and diversifying loan book (middle market lending, mortgages, credit cards).
    • Replacing high-cost debt with low-cost deposits.
  • Competitive advantages which come from:
    • Online bank which has no branches, therefore lower costs which are passed on to customers via higher savings rate.
    • Brand and online bank concept resonates with millennials, which make up a majority of existing and new customers (#1 Online Bank and #1 Millennial Bank according to Kiplinger’s).
    • This is clearly seen in their 20% growth in deposit base (w/o a major increase in savings rate), higher market share of online banks in total deposits (8%), and Ally’s growing market share of deposits of online banks (16%).
    • Scale and market knowledge in the auto lending space from being a Top 3 player.

In the next decade, Ally will benefit from:

  • Continued growing US retail deposits (which have grown in the past 100 years), growing market share of online banks out of total deposits, and growing market share of Ally within online bank deposits. This triple tailwind is what has led deposits to grow at a 20% clip and I expect that to continue, possibly at a slower, but still high rate.
  • Net interest margins should expand from higher rates, improved underwriting and lower cost of funds.
  • Lower efficiency ratio will drive higher margins through operating leverage.
  • Lower regulatory costs.
  • Higher ROE from expanding margins, good capital allocation, possibly less strict regulation which currently ties up capital.
  • Increasing asset base coming from a continued increase in deposits that should lead to a larger and more diversified loan book as they enter and expand into new markets and products via cross-selling.
  • Share buybacks which are the preferred method of capital return at current low multiples.
  • And eventually, a higher multiple should be warranted.

Picturing how Ally may look like in 10 years – A deposit driven model (simplistic and for illustrative purposes)

Although this may seem like a stretch at first sight, the point I’m trying to get across here is that this is a possible scenario and one that you are clearly paying absolutely nothing for! I have little sense of what the probability of this happening is, but this is where management intends to go and the track record shows that the growth in deposits should continue in the next few years, as it shows no signs of slowing down and in fact has accelerated. For reference, please take a look at John Huber’s great article on the predictability of Wells Fargo’s deposit growth and how it has driven its share price over the years: Wells Fargo and the Incredible Predictability of Deposit Growth

I expect Ally to maintain its growing deposit base for the next 10 years, at a 15-20% clip, benefiting from growing US retail deposit, growing share of online banks, and growing share within online banks (all of these trends have been playing out in the past 10 years)

Market Analysis in $Bn hist. % growth Exp. growth Considerations
Total US domestic deposits 12,100 6.80% doesn't consider commercial deposits, which grow faster
Retail deposits up to 250K 5,900 3.00% 3% growth is maintained
Online banks total share $ 488 8.20% 10% assuming it accelerates given millenial preference
Online banks market share % 8.20%
Ally total share $ 77 20% 18% growth slows down
Ally market share % (of online) 16%

Balance sheet approach: If this growth is maintained, Ally would have approximately $400B in deposits by 2028, if we assume it is 70% funded from retail deposits and with a leverage ratio of 12X, that would imply a book equity value of $48B. Assuming Ally maintains its buyback program and is buying back 4% of outstanding shares each year, share count would be reduced by ~34%, and with a P/B ratio of 1.5X, the share price would be $250 per share.

Assumptions 10 years out

Balance Sheet Approach

in $Bn


Total retail deposit market


maintaining historical growth rate

Total market share direct banks $


growth accelerates to 10%

Total market share direct banks %


Total deposits Ally $


growth slows to 18%

Total Ally market share online deposits


from 16% currently

Total Ally market share retail deposits


from 1.3% currently



assuming 70% retail deposit funded

Leverage ratio


average big banks

Book value of equity


ending P/B


conservative, realistic multiple

Equity MV


Shares outstanding current


Shares outstanding in 10yrs


buyback 4% p/yr in the next 10 years

Implied share price (1)


Income approach: Another way to tackle this is by taking total assets of $575B (from above table) and working out an income statement from the balance sheet. Assuming 50% of assets are in loans (similar to large diversified banks, the rest in securities), a 3.5% net interest margin would imply $10B of Net interest income. Assuming another 50% comes from non-interest income (commissions, fees, gains on securities, etc.), we arrive at $10B of non-interest income, for total revenues of $20B (3.5X vs. today). Subtracting from this loan loss provisions (call it 1.2%), operating expenses (efficiency ratio of 45%, above management target) and taxes (25%), brings us to a net income figure of $5.7B (5.5X today, benefiting from operating leverage). This would imply a Return on Assets (ROA) of 1% and Return on Equity (ROE) of 12%, both realistic. Using the same assumptions of share count from repurchases, and a PE multiple of 14X (in line with historical bank multiples), implied share price would be $275.

Income approach

in $Bn


Total loans


50% of assets in loans

Net interest margin


should expand over time

Net interest income


Non-interest income


roughly equal to interest income given loans to assets ratio

Total Revenues


Loan Loss Provisions


assumes 1.2%

Operating expenses


assumes 45% efficiency ratio, above management target, but lower than industry given no branches






Net income


operating leverage should expand margins



in line with long term target, lower end of range

Loans-to-deposits ratio


healthy ratio



Ending P/E


conservative multiple, in line with historical for banks

Implied share price (2)


If we take the average of the balance sheet and income approach share price, we arrive at a price of $263, which would suggest an annualized return of 26% for the next 10 years (ex. dividend).

Current price


Average implied share price


Annualized return w/o div


This is clearly an exceptional return, so even if we tone down the assumptions and expectations, we can see that Ally is likely to provide a satisfactory return in the next 10 years, as long as deposit growth is maintained and management maintains a sensible underwriting discipline. The market is not pricing any of this at the moment. Ally seems to be a growth stock hiding in plain sight for those willing to take the long-term view.

Sources: Ally 10-K, 2018 Financial Outlook Presentation, John Huber's article on Wells Fargo's Deposit Growth

Disclosure: I am/we are long ALLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.