Some well-known businesses in the financial services sector have done remarkably well for investors recently. Shares of industry heavyweights Goldman Sachs and JPMorgan Chase, as well as younger fintech providers SoFi Technologies and Robinhood Markets, have surged in the past 12 months.

That's why it comes as a surprise that shares of Ally Financial (ALLY 1.06%) are up just 2% in the last year (as of Feb. 26). Even worse, they trade 34% below their all-time high from June 2021. Maybe Ally is on the radar of investors looking to add portfolio exposure to the industry.

Should you buy, sell, or hold this beaten-down bank stock right now?

Growth outlook

Ally Financial's digital-only operating model helps reduce overhead expenses, allowing the business to offer higher savings rates than most rivals. This helps drive deposit growth, which is a low-cost and sticky source of capital for a bank. As of Dec. 31, 2024, Ally had $152.7 billion in retail deposits, which was down slightly year over year. However, this figure has trended higher over time, something that should continue in the years ahead.

Deposits provide fuel for Ally to originate more auto loans, which are its bread and butter. Management is refocused on this business line, as it has sold the credit card portfolio and stopped originating mortgages. With the belief that interest rates will come down in the near term, there could be a stronger demand from consumers to buy vehicles, which can drive greater loan volume for Ally.

The higher-rate environment has created a headwind for Ally. Retail auto net charge-offs hit 2.34% in the fourth quarter, and the leadership team set aside almost $2.2 billion in provisions for credit losses in 2024. On the bright side, the average borrower has a FICO score of 712, up meaningfully from a couple years ago. That provides some safety.

It's easy to be bullish when you look at Wall Street's outlook. Consensus estimates call for adjusted earnings per share (EPS) to absolutely soar, from $2.35 in 2024 to $6.69 in 2027. While the predictions for each analyst have a wide range, if Ally is able to get even remotely close to these targets, it would be a wonderful outcome.

Risks to keep in mind

Investing in the banking industry is difficult because companies sell what are largely commoditized offerings. In Ally's case, it stood out because it was a digital platform. But people now have numerous ways to earn high savings yields with their money, with many tech-enabled banking providers finding outstanding success in recent years. It'll be harder for Ally to win new customers, in my opinion.

Ally has clearly built up a core competency in auto lending. But this introduces concentration risk, as more than half of the loan book is represented by retail auto loans. New car sales are notoriously cyclical. So, any unfavorable developments, such as an economic downturn or persistently high inflation, can create a major headwind.

At a higher level, it's important not to ignore the effect that interest rates can have on a bank's financial performance. Ally had a banner year in 2021, with huge revenue growth and net income that nearly tripled. But at the drop of a hat, the environment can worsen, as it did starting in 2022. These things are unpredictable, adding a major element of uncertainty for investors.

Valuation is critical

Ally shares can be bought at a price-to-earnings ratio of 14.2 right now. But remember that this valuation metric might be artificially inflated because it's based on 2024 EPS of $2.35, which was the lowest level since 2016. Assuming the business can start to grow that bottom-line figure at a healthy clip over the next few years, the stock should do very well.

There are certainly risks to be mindful of. But it's hard not to like the opportunity Ally presents, making shares a worthy buy today for long-term investors.