Where Will Ally Stock Be in 5 Years?

Ally Financial (NYSE: ALLY) was a major beneficiary of the COVID-19 pandemic. As a consumer bank and automotive loan originator, the company saw tailwinds on both sides of its business. People who took out automotive loans paid them back on time due to stimulus checks and less spending on things like travel. Low interest rates and people searching for digital solutions meant more people seeking online banks such as Ally.

In 2022, these tailwinds turned sharply into headwinds, causing volatility for Ally's business. Rising interest rates meant it needed to pay more out to depositors in order to retain customers, while repayments on automotive loans got worse. This caused a sharp drop in Ally's earnings per share (EPS) and stock. Even though Ally's stock has recovered from the lows in 2023, it is still off 30% from all-time highs set in 2021.

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Is the company now on the road to recovery? With interest rates falling again and the normalization of the automotive market, it might just be. Here's where Ally stock could be five years from now.

Simplifying the lending business

Before the last few years, Ally Financial was making a major push to diversify away from automotive loans, its bread and butter. This included things like home mortgages and credit cards. Credit cards proved difficult to make profitable, while mortgage loans at ultra-low interest rates are now a drag on the company's balance sheet, providing a headwind to earnings.

In order to focus its operations, Ally is selling its credit card business and is not originating new home mortgage loans, letting its existing portfolio run off in the coming years. This will help the company focus on automotive loans, insurance for its automotive dealer partners, and a smaller (but successful) corporate lending segment.

Ally originated close to $40 billion worth of car loans in 2024 and hit a record of written premiums for its insurance business. Retail automotive loans made in 2024 are performing better than in 2022 and 2023, with better credit metrics and higher yields. Both insurance and corporate finance are profit generators for the business and can grow in the next five years.

On the whole, it looks like Ally is beginning to right the ship for its lending operations.

Can consumer deposits grow again?

Since beginning its online bank over 10 years ago, Ally has seen consistent growth in customer acquisition and deposits. Growing deposits is important for a bank, as these are much cheaper capital than capital market loans to fund your own lending operations. Essentially, the more deposits Ally Financial has, the better.

In recent years, Ally's growth in deposits has slowed. It ended 2021 with $135 billion in retail deposits. By the end of 2024, this figure had only grown to $143 billion. While not moving in the wrong direction, this is a major slowdown for Ally's deposit growth that coincided with the Federal Reserve interest rate hikes. Ally has felt the pinch from competitors, such as SoFi, that are aggressively offering higher rates on savings accounts. Ally has decided not to chase depositors as aggressively, offering a 3.7% interest rate today vs. 3.8% at SoFi, as an example.

While competition for deposits will always be there, I think Ally has gotten through to the other side of this cost pressure on its business, with the Federal Reserve stopping its interest rate hikes and slowly bringing them down. This will make it so Ally doesn't have to pay as much out to depositors every year and will hopefully lead to more customers joining the bank in the next five years. The more deposits it has on the balance sheet, the more loans it can make, which will lead to earnings growth.

ALLY EPS Diluted (TTM) data by YCharts

Betting on earnings normalization

Ally stock does not look dirt cheap today, with a price-to-earnings ratio (P/E) of 15. However, its earnings are currently depressed due to the factors discussed above. Its EPS was $2.60 over the last 12 months vs. over $7.50 at the peak in 2021. I don't believe Ally can return to $7.50 in EPS within five years, but with the normalization of the business, I think it can easily return to $5 or higher.

All this will take is the company slowly shedding its non-core operations while recycling its automotive loan book from the underperforming 2022 and 2023 vintages to the (hopefully) better-performing current vintages. Combined with a solid corporate finance operation and auto retail insurance division, the company should see consistent earnings growth over the next five years.

At an EPS of $5, Ally would trade at a P/E under 8, which is taking its current stock price of $39 and dividing it by $5. This is a cheap earnings multiple. I think Ally will trade at a higher earnings multiple than 8 in five years, which means that the stock price will be higher. Add in a dividend yielding 3%, and the returns look even better.

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Ally is an advertising partner of Motley Fool Money. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.