The Long and Short
Revisiting Ally Financial as a value among bank credits
This material is a Marketing Communication and does not constitute Independent Investment Research.
Private credit fears continue to leave their mark on parts of the investment grade market. Consumer finance companies and banks with any private credit exposure, such as Ally Financial (ALLY: Baa3/BBB-/BBB-), are among those that still reflect these concerns. There’s reason to believe that ALLY corporate bonds are still being undervalued on the heels of very strong second quarter results.
One clear bone of contention in the market last year was the aggressive growth in private credit, which weighed heavily on issuers like ALLY and similarly positioned peers. Many of those concerns have dissipated in recent months, as the market has seen a stark recovery in private credit-exposed lenders, most notably in BDCs. Still, similar to the threat that AI poses to traditional software and technology operators, there remains an undercurrent of risk that could easily resurface with similar idiosyncratic headlines that moved the market in late 2025.
ALLY’s inclusion among this private credit cohort has seemed highly overblown. Direct exposure to middle market lending and private credit appears limited to its roughly $13.7 billion portfolio of non-auto corporate finance loans amidst total loans of about $140 billion. And credit performance in this small portion of ALLY’s lending has remained remarkably consistent. The last delinquency/non-accrual in their non-auto corporate finance portfolio was reported roughly eight years ago. Furthermore, overall lending at Ally Bank to non-bank financial institutions (NBFI) represents just 2.95% of total assets compared to an average level of about 7% across most US banks. Growth in that segment for ALLY has ramped up a bit to 34% year-over-year as of the most recent quarter but is relatively neutral to the rest of the industry, while the 5-year growth rate of just 214% is running significantly below peers.
While ALLY credit instruments rightfully trade in a tighter range than the most conservative cohort of low-‘BBB’ middle-market lenders, such as BDCs, they still reflect a substantial discount to most similarly-positioned consumer finance operators (Exhibit 1). This presents an opportunity to increase exposure and consider alternatives to move down in structure to ALLY’s subordinated and hybrid instruments for incremental spread and yield. In May of this year, ALLY issued a PerpNC5 hybrid structure (rated Ba2/BB-/B+), which remains priced near its launch level of approximately 7.1%. This represents a premium of over 140 bp to commensurate ALLY 5-year senior bullets. The average pick for similar ‘BB’-rated hybrid structures with roughly 5-year calls more typically falls below 130 bp.
Exhibit 1: ALLY still trades wide to investment-grade consumer finance peers
Source: Santander US Capital Markets LLC, Bloomberg/TRACE spread/price indications only
ALLY’s attractiveness to the broader regional banking sector is also apparent with mostly only outliers and the few lower-BBB regional banks trading wide of the ALLY curve (Exhibit 2).
Exhibit 2: ALLY also trades wide to broader regional bank peers
Source: Santander US Capital Markets LLC, Bloomberg/TRACE spread/price indications only
ALLY reported strong second-quarter operating results this week, which continued to alleviate concerns about credit deterioration in auto lending. In the second quarter, the net charge-off rate declined 18 bp to 1.57%, which was the sixth consecutive quarter of year-over-year improvement, while delinquencies declined 8 bp year-over-year to 4.80%. These levels remain somewhat elevated to pre-pandemic levels, but the lack of acceleration continues to demonstrate ALLY’s conservative lending standards across its franchises. The provision for credit costs did increase a modest amount ($46 million) year-over-year to $384 million as reserves increased $36 million year-over-year to $3.58 billion. This all appears commensurate with the gradual seasoning of the auto portfolio, versus an indication of active credit deterioration.
ALLY increased its concentration in auto lending last year through the sale of its credit card and mortgage businesses. The loss of those businesses could also make the lender slightly more susceptible to deposit migration for its all-online deposit base. However, in doing so the company significantly enhanced net interest margins going forward (approximately 40 bp at the time), reduced expected credit losses, and can focus more on its core competencies. The digital deposit base results in higher deposit betas relative to typical lenders but greatly reduces costs associated with brick-and-mortar branch banking. ALLY reported 18 bp in year-over-year net interest margin (NIM) growth to in the second quarter to 3.63%.
ALLY’s digital deposit platform remains relatively liability sensitive and subject to competitive rates for depositors. Rising interest rate trends on recent geopolitical events put pressure on profit margins. Nevertheless, deposits represent approximately 87% of funding, which is up from 66% just seven years ago. Meanwhile, ALLY’s reliance on brokered deposits, which are considerably less sticky and potentially more costly, are less than 4% off a recent peak of over 8% in 2022 and as high as 14% back in 2018. ALLY also benefits from an extremely low level of uninsured deposits (just roughly 8%) relative to typical bank lenders (anywhere from 20 to 50%, COF is 15%) given its unique auto-focused loan mix.
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