BofA Upgrades Ally Amid Favorable Lending Backdrop

After last week’s strong earnings beat, Ally Financial Inc (NYSE: ALLY) converted one of its last remaining fence-sitters to boast a 14-5 buy-sell ratio.

The Rating

Bank of America Merrill Lynch analyst Kenneth Bruce and two others upgraded Ally from Neutral to Buy and raised the price target from $33 to $35.

The Thesis

The 25-percent upside projection is based largely on a favorable lending environment, Bruce said in the Monday upgrade note. (See the analyst's track record here.) 

“Given recent trends in auto sales, credit and used vehicle pricing, we are less concerned that cyclical pressure will undermine the fundamental backdrop or sentiment for ALLY,” the analyst said. “Concerns that tariffs directed at the auto industry could impact the sector will likely persist, however, we think ALLY’s near-term business momentum will underscore the upside earnings case, thus arguing for a better PE multiple and decent upside in the stock.”

Ally anticipates full-year credit losses for retail auto loans on the lower end of 1.4-1.6-percent guidance. Impending rollover of expensive debt is expected to offset higher rates and betas to drive margins.

While an increase in deposit betas could drive volatility in the earnings outlook, bottom-line growth is expected to attract investors with solid upside in Ally's stock, Bruce said. 

Price Action

Ally shares were trading up 0.51 percent to $27.38 at the time of publication Monday.

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