Ally Financial Analysts Cast a Critical Eye on Its Earnings Beat

(Bloomberg) -- Ally Financial Inc. wavered between gains and losses as analysts cast a critical eye at the company’s net interest margins, cost of deposits and lower-than-expected auto loan originations even as third-quarter earnings topped the highest estimate. The shares were little changed at 10:46 a.m. in New York after earlier sinking as much as 3.1 percent.

Morgan Stanley, Betsy Graseck

  • A reserve “bleed” was the biggest driver of Ally’s earnings-per-share beat, Graseck says; that positive credit beat may be offset by continued pressure on deposits.
  • She flags Ally as having the highest increase in deposit beta among large-cap banks reporting so far in the third quarter, which drove a five basis point miss on net interest margin, along with “another quarter of slower deposit growth.”
  • Graseck also points to auto originations of $8.1 billion, which trailed Morgan Stanley’s estimate of $9.5 billion, along with flat growth in the quarter.
  • Rates Ally equal-weight with a price target of $32.

KBW, Sanjay Sakhrani

  • Ally reported “a decent quarter on the backs of stronger credit trends and lower provisions, and the outlook for the full year looks strong relative to management’s previous expectations and our estimates.”
  • Sakhrani adds that “modest top-line weakness was offset by lower provisions,” while Ally’s auto net charge-off and delinquency rates beat expectations.
  • At the same time, investors may be focused on the third quarter’s softer originations growth, though that may be due to greater selectivity. Sakhrani notes net finance revenue was about 2 percent weaker than KBW’s expectations while originations were about 7 percent weaker, and net interest margin was also about 9 basis points weaker than his estimate.
  • Rates Ally outperform with a $37 price target.

Susquehanna, Jack Micenko

  • The beat relative to Susquehanna’s estimate “was primarily due to lower taxes, but better fee income and lower provision helped as well.”
  • “Loan growth was muted and deposit growth was in-line with forecast.”
  • Auto yields showed further improvement versus the prior quarter, as did risk-adjusted yield, but deposit costs increased 20 basis points sequentially, and as such NIM compressed 1 basis point.
  • Rates Ally positive with a price target of $38.

Piper, Kevin Barker

  • Barker called it a “nice credit beat combined with strong guidance update,” and said that operating results beat amid a “significant decline in provision expense and higher fee income.”
  • “Importantly, the bank was able to grow deposits” about 10 percent quarter-over-quarter, annualized, while total funding costs increased just 15 basis points, slightly better than what Piper had been expecting.
  • Rates Ally overweight with a price target of $33.

Instinet, Bill Carcache

  • “The combination of today’s print and Ally’s improved outlook may drive positive estimate revisions, driven by a better outlook for credit, though there appears to be modest downside to net financing revenues.”
  • Rates Ally neutral with a $28 price target.

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