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BofA Securities upgraded Ally Financial (NYSE:ALLY) to Buy from Neutral as analyst Brandon Berman sees upside potential to management's $6 medium-term earnings target and lower earnings volatility from recent balance sheet actions. Furthermore, potential credit leverage may be underestimated, he said.
Ally (ALLY) stock rose 2.4% in Tuesday premarket trading.
While the effect that rate cuts will have on Ally's (ALLY) funding costs is widely understood, "we see limited risk to NII (net interest income) estimates if (the) Fed doesn't cut rates in '24," the analyst wrote in a note to clients. "In fact, we see the benefit from rate cuts as having a muted impact to NIM (net interest margin) in '24."
He explained that fewer rate cuts translate to a smaller headwind to asset yield. At the same time, Ally (ALLY) has started to reduce rates paid on deposits without a notable impact on balances.
On the credit side, Berman said early indications show that the 2023 vintage is outperforming, due partly to its shift toward higher credit tiers, while loan modifications only account for 33 basis points of loans. As a result, he expects losses to peak in Q2 2024.
"Given the bank's increased exposure to a higher FICO consumer (~40% of origination volume) — which should help to improve the through-the-cycle loss content, and thus reduce earnings volatility — we see the current multiple as 'sticky'," the analyst said. Absent a recession, he sees no reason for the stock's multiple to re-rate lower.
Berman's Buy rating on Ally (ALLY) contrasts with the SA Quant rating and average Wall Street rating, both at Hold, and aligns with the average SA Analyst rating of Buy.
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