Ally Financial (ALLY) Beats on Q2 Earnings; Stock Slides

Ally Financial Inc. ALLY delivered a positive earnings surprise of 3.9% in the second quarter of 2016. Adjusted earnings of 54 cents per share outpaced the Zacks Consensus Estimate of 52 cents. Also, the figure improved 17.4% from the prior-year quarter.

Results benefited from growth in revenues. Additionally, improved finance receivables and loans acted as tailwinds. However, a rise in provisions and escalated expenses were on the downside, perhaps causing the stock to decline 1.25%.

Ally Financial’s net income for the quarter surged 97.8% year over year to $360 million.

Higher Revenues Offset Expense Pressure

Total net revenue climbed nearly 20.5% year over year to $1.36 billion owing to a rise in net finance revenue and total other revenue. Moreover, the figure surpassed the Zacks Consensus Estimate of $1.33 billion.

Controllable expenses came in at $463 million, down 2.4% from the prior-year quarter. Conversely, other non-interest expenses increased 14% year over year to $310 million.

Credit Quality Deteriorates

Non-performing loans of $734 million were up 14.3% year over year. Moreover, provision for loan losses surged 23% year over year to $172 million, driven by a full credit spectrum portfolio mix and the continued shift toward retail auto loan assets and fewer leasing assets which do not contribute to provision expense, as well as a commercial auto provision release a year ago.

Balance Sheet Strengthens, Capital Ratios Decline

Total finance receivables and loans amounted to $111.6 billion as of Jun 30, 2016, compared with $109.8 billion as of Mar 31, 2016. Further, deposits totaled $72.8 billion, up from $70.3 billion as of Mar 31, 2016.

As of Jun 30, 2016, total capital ratio came in at 12.8%, down from 13% at the end of the prior quarter. Tier I capital ratio stood at 11.2%, compared with 11.6% as of Mar 31, 2016.

Our Take

Though Ally Financial has streamlined its operations, de-risked balance sheet and enhanced its focus on risk-adjusted returns, it continues to explore additional products, services and technologies to boost further growth. The company has initiated share buyback and dividend payment. However, we remain concerned about the high debt level, stringent regulations and concentration risks taking a toll on the company’s profitability in the upcoming quarters.

Currently, Ally Financial carries a Zacks Rank #3 (Hold).

Performance of Other Finance Companies

Sallie Mae SLM reported core earnings of 12 cents per share in second-quarter 2016, outpacing the Zacks Consensus Estimate by a penny. Results were driven by increased net interest income. However, the quarter witnessed higher expenses and a significant rise in provisions.

Navient Corporation’s NAVI second-quarter 2016 core earnings of 47 cents per share beat the Zacks Consensus Estimate of 45 cents. Also, the figure represents a 17.5% increase from the prior-year quarter.

Among others, Capital One Financial Corporation COF reported adjusted earnings of $1.8 per share, lagging the Zacks Consensus Estimate of $1.9.

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