Ally Financial (ALLY 0.10%) is a bank. But it isn't your typical bank by any stretch of the imagination, given that it is highly focused on the auto lending space. That focus is increasingly in focus as management executes a business overhaul. This brings up some big news from the fourth-quarter earnings release: the sale of Ally's credit card business.

What does Ally Financial do?

Ally Financial was created when it was spun off of General Motors. Prior to the 2014 spinoff, it was GM's financing arm. So it shouldn't be surprising to find out that auto loans are a massive part of Ally Financial's business even to this day, making up roughly 60% of the bank's loan book at the end of 2024. That is a far greater percentage than you'll find at most banks.

Image source: Getty Images.

Ally focuses on higher-quality borrowers, so its auto loan portfolio probably shouldn't be a huge credit risk concern. However, being so reliant on this single product is a big issue. Auto loans are impacted quickly by economic swings, since customers will likely prefer to lose the car over losing the house. And the not-so-subtle fact is that the number of people who buy cars falls during recessions as consumers look for ways to save money.

That doesn't make Ally a bad company. But it does suggest that its financial performance could be more volatile than a bank that has more diversification -- or at least one that isn't quite as reliant on cyclical auto sales. This is why the company had been working to expand its portfolio of products. The goal was simply to become more like other banks and less like a dedicated auto lender.

Ally is shifting gears again

The problem with the diversification plan was that Ally doesn't have the store base other banks have. So it has had a hard time building out other businesses where it doesn't have the same entrenched business that it has in the auto sector (it has relationships with 22,000 auto dealers). As such, building out a mortgage business and a credit card operation, for example, wound up being a costly affair. And Ally was still just a small player.

This is why it exited the mortgage business in 2024 and announced along with fourth-quarter 2024 earnings that it had agreed to sell its credit card operation. Exiting what amounted to lower-margin operations that were, perhaps, more of a distraction than benefit should improve overall financial performance. In that respect, slimming down is a good thing.

However, jettisoning these businesses means that Ally will be even more reliant on its auto lending operation in the future. It is a sizable business, and Ally benefits from its size and reach in the auto lending space, but refocusing on auto lending also increases risk. That probably won't be readily apparent until there's a recession and auto loan default rates tick up and auto sales slow down. In other words, the company is making decisions that are a near-term benefit, but the long-term impact is much less clear and potentially much less positive.

Know what you are buying

There's nothing inherently wrong with Ally Financial's business. In fact, it managed to more than double generally accepted accounting principles (GAAP) earnings year over year in the fourth quarter of 2024, going from $0.11 per share in 2023 to $0.26 in 2024.

That said, investors need to understand that it isn't a typical bank. As long as you go in cognizant of its (increasingly) heavy exposure to the auto lending space, there's no reason for you to avoid it. But recognize that having such a focused portfolio could be a huge negative during periods of economic weakness.

If you aren't prepared for what could be a deep drawdown in the shares as investors run for cover in a recession, you should probably reconsider your commitment to Ally Financial today.