As mortgage rates are expected to remain higher for longer, Ally Financial ALLY will be exiting the mortgage origination business. Further, the company is seeking “strategic alternatives” for its credit card business. The company will likely fully exit both businesses by the end of this quarter.

Further, as a result of this restructuring, Ally Financial will be laying off less than 5% of employees, but these are not specific to any location or operation. The company spokesperson, Peter Gilchrist, revealed these details.

In December 2024, during the Goldman Sachs Financial Services Conference, ALLY CEO Michael Rhodes stated that Ally Bank, a subsidiary of Ally Financial, no longer originates mortgages to its balance sheet and mostly does originate-to-sell on the secondary mortgage market. In the past few quarters, the company’s origination volume dwindled as mortgage rates continued to be high.

Direct-to-Consumer Origination
 

Image Source: Ally Financial Inc.

The company’s low mortgage origination volume indicated the current challenging operating backdrop. Also, more than 70% of the company’s direct-to-consumer mortgage originations were sourced from its existing depositors, indicating it was not actively pursuing to expand the business.

Additionally, in December, Rhodes noted that after taking a “hard look” at areas of growth for Ally Financial, it was concluded that the credit card business is not at the top of the list for additional investment. As of Sept. 30, 2024, the company had $2.13 billion in average credit card loans, with 1.25 million active cardholders.

Given this reorganization, ALLY is now expected to focus majorly on its auto franchise, its largest and original business. “We remain confident in our long-term strategy and our ability to deliver compelling returns given the strong underlying trends in our core businesses,” Gilchrist said.

Headwinds Faced by Ally Financial

ALLY is facing asset quality and higher interest rate-related concerns. On its third-quarter 2024 conference call, the company noted that the current “dynamic operating environment,” including high interest rates, volatility and “cumulative inflationary pressure,” has strained its consumers. This has, thus, resulted in “more volatility in our near-term outlook, particularly on credit costs and margin.”

Retail Auto Net Charge-offs
 

Image Source: Ally Financial Inc.

Along with the third-quarter results, the company announced changes to its asset quality and net interest margin (NIM) targets for 2024. Ally Financial expects loan losses to increase in 2024. Retail auto net charge-off (NCO) rates are projected to be between 2.25% and 2.30% for 2024, up from the prior target of 2.1%. Further, consolidated NCOs are likely to be in the 1.50-1.55% range, up from the earlier guidance of 1.45-1.5%.

Likewise, given the near-term headwinds, it lowered the NIM target for 2024. ALLY now projects NIM to be almost 3.20% (assuming 50 basis point rate cuts in the fourth quarter and slower deposit betas), down from earlier guidance of approximately 3.30%. In 2023, NIM was 3.32%.

Our Take on Ally Financial

With more interest rate cuts expected this year, the company is well-poised to benefit from it over the medium term, driven by the liability-sensitive nature of its balance sheet and the rise in consumer loan demand. Management expects NIM to hit 4% over the medium term.

Because of the above-mentioned concerns, investors turned bearish on Ally Financial stock. Last year, the company shares gained just 4.1%, substantially underperforming the Zacks Consumer Loan industry’s rally of 34.3%.

On the other hand, its peers like Capital One COF and SLM Corp. SLM had an impressive run on the bourses. In 2024, COF was up 36%, while SLM jumped 44.2%.

2024 Price Performance
 

Image Source: Zacks Investment Research

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

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