January 30, 2023 | Premium Service | On January 23, 2023, the Lex column of the Financial Times carried a shameless public endorsement of the stock of Ally Financial (ALLY), a $200 billion asset wholesale funded bank that focuses on auto lending. Suffice to say this is one of those instances when we wonder why journalists that make specific stock recommendations to retail investors are not subject to FINRA regulation.
Now a century old, ALLY was the captive finance unit of General Motors (GM) and over the decades mutated into a mortgage issuer within GM, ultimately leading to the spinoff of what is today Ally Bank in 2010 and the bankruptcy and liquidation of Residential Capital in 2012. Some twelve years later, ALLY is still more finance company than bank and really has no core deposit base worthy of the name. If you acquired ALLY tomorrow, a discriminating buyer would pay no deposit premium and might even ask for a discount.
We last wrote about ALLY in July (“Update: Ally Financial (ALLY)”), when we noted that the bank has a yield on its loan book that is too low and a cost of funds that is too high. ALLY is forced to compete for funding with some of the largest market facing banks including CapitalOne (COF), Goldman Sachs (GS) and Barclays Bank (BCS). Notice that all of these banks are paying at least 3.3% for funding compared with SOFR closing in on 4.5%. Meanwhile, the average interest expense for the largest US banks is still below 1%
None of these public facts prevented the FT from engaging in hyperbole that really begs the question as to why they wrote this column at all. Could the team of reporters that so courageously tracked down the Wirecard AG fraud really get a simple analysis of a $200 billion consumer bank so badly wrong? Yes they can. Consider this perfect regurgitation of ALLY’s IR twaddle:
“Ally has in recent years increasingly relied, sensibly, on consumer deposits to fund its lending. To do so it offered high saving rates. Last year, to remain competitive, Ally had to boost savers’ yields even as its loan book returns were locked in. Net interest margins have since waned, towards 3.5 per cent, a figure the company believes will mark the bottom.”
Consumer deposits? Not only is this statement factually incorrect, but it suggests erroneously that ALLY actually has a retail deposit base like JPMorgan (JPM) or Bank of America (BAC). In fact, ALLY is exactly comparable to GS, which has a base of “core deposits” that are very yield sensitive and will walk out the door if the bank does not keep pace with the bulletin boards for brokered deposits. But then the FT concludes their little stock pitch with the following drivel:
“Ally very much offers a role model for what Goldman Sachs wanted in consumer finance. With sufficient scale in lending, plus some good fortune on the economy, Ally’s return on shareholder equity can easily bounce back into double-digit percentages again.”
No, actually GS has done a better job building its admittedly flawed Marcus than ALLY has done building its online bank. We have some significant issues with the GS business model, but the ALLY model is clearly a monoline consumer finance business with no real reason to exist. There is no competitive advantage for ALLY occupying the funding killing field between the large banks, on the one hand, and the more aggressive bank and nonbank consumer lenders on the other.
Let’s take a look at some quantitative comparisons between ALLY and its peers in the world of narrow banks using the data from federal regulators. Notice that we choose as our comparable firms the usual suspects – GS/C/COF and have also added the $180 billion asset US unit of Barclays Bank PLC (BCS), Barclays US LLC, which is a monoline issuer of credit cards. All of this FFIEC data is public and has a consistent accounting taxonomy in terms of presentation, but few members of the media or Buy Side analyst ratpack ever bother to look. They are too busy.