Ally Financial ALLY has announced a balance sheet repositioning initiative aimed at supporting net interest income (NII) and net interest margin (NIM) expansion. 

As part of this effort, ALLY sold lower-yielding available-for-sale investment securities, which had an amortized cost of nearly $2.8 billion, for $2.5 billion. As such, the company will incur a pre-tax loss of $250 million in the ongoing quarter. 

Ally Financial reinvested the proceeds into shorter-duration, highly liquid securities at current market rates. The company expects the repositioning to lower its CET1 ratio by almost 12 basis points. Further, the initiative is projected to slightly increase NII and NIM in the upcoming quarters.

Several U.S. banks, including Associated Banc-Corp ASB and KeyCorp KEY, resorted to balance sheet restructuring to counter the adverse impact of high interest rates on NII and NIM. As part of the balance sheet repositioning strategy, ASB sold approximately $1.3 billion of investment securities (yielded 1.87% on average) and $0.7 billion of low-yielding mortgage loans. ASB reinvested the proceeds in almost $1.5 billion of higher-yielding securities (yielding 5.08% on average). Likewise, KEY sold $10 billion of lower-rate securities to invest in higher-yielding paper.

Efforts by ALLY to Streamline Organizational Structure

Ally Financial has been restructuring its operations to create a simplified and streamlined organizational structure. As such, the company announced some business actions in January. These included an agreement to sell its credit card business to CardWorks and its wholly-owned bank subsidiary, Merrick Bank. The card portfolio included $2.3 billion in credit card receivables with 1.3 million active cardholders as of Dec. 31, 2024.

The financial terms of the deal were not disclosed. The transaction is expected to close in the second quarter of 2025. The sale is expected to add 40 basis points of CET1 ratio at closing and $1 of adjusted tangible book value per share. The company booked $118 million of goodwill impairment charges in the fourth quarter of 2024 and expects to incur $10-$20 million of one-time transaction-related expenses almost at the time of closing.

Apart from this, ALLY ceased originating new mortgage loans from Jan. 31 and announced workforce reduction. The workforce reduction is expected to position the company for annual cost savings of $60 million. 

In March 2024, Ally Financial divested its point-of-sale financing business, Ally Lending. 

Further, as part of this initiative, Ally Financial plans to invest resources in growing core businesses and strengthen relationships with dealer customers. Given the relatively lower interest rates, demand for consumer loans is expected to improve. The company is expected to witness a rise in net financing revenues in the quarters ahead, driven by strong origination volumes and retail loan growth.

Our Take on ALLY’s Efforts to Focus on Core Business

The balance sheet repositioning and other business simplifying efforts underscore Ally Financial’s commitment to long-term growth and profitability. While the immediate financial impact is a cause of concern, the company’s strategic vision – optimizing its asset mix, boosting capital and seizing growth opportunities – positions it well for success.

Shares of ALLY have lost 11.9% in the past six months against the industry’s rally of 25.7%.
 

Image Source: Zacks Investment Research

At present, Ally Financial carries a Zacks Rank of 3 (Hold). You can see the complete list of today's Zacks #1 Rank (strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

KeyCorp (KEY) : Free Stock Analysis Report

Ally Financial Inc. (ALLY) : Free Stock Analysis Report

Associated Banc-Corp (ASB) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research